Thursday, September 5, 2013

The Financial Stability Board, Mark Carney, is not telling the truth to the leaders of G20

Mark Carney, in the name of The Financial Stability Board (FSB), on September 5, 2013, reports to the G20 Leaders the following:

"In Washington in 2008, the G20 committed to fundamental reform of the global financial system. The objectives were to correct the fault lines that led to the global financial crisis and to build a safer, more resilient source of finance to serve better the needs of the real economy... FSB members have made major progress correcting the fault lines that caused the crisis.

And that is just not true.

The major fault line that lead to the global financial crisis, were capital requirements for banks which allowed banks to earn much much higher risk-adjusted returns on equity on exposures that were perceived as “absolutely safe”, than on exposures perceived as” risky”. 

That consequentially stimulated the banks to build up excessive exposures to The Infallible, The AAAristocracy, and which later, in much as a result of it, when some of these exposures turned sour, it found the banks standing there naked with little capital to cover themselves up with.

And that problem, of how the capital requirements distort and makes it impossible for the banks to allocated bank credit efficiently to the real economy, has not even yet begun to be discussed, at least not in public.

The ridicule small capital requirements for some “ultra-safe” exposures also served as the most important growth-hormone for the “too big to fail” banks.

FSB also states in the document that “the risk models that banks use to calculate their capital needs show worryingly large differences” . And I ask,  what’s their problem? Do they want the whole world to use the same risk models, so that when these turn out wrong, as they will do sooner or later, everyone goes down the tube in a virtuous kumbayah like solidarity? 

When will these regulators understand their duty is not to assure the existence of the right risk-models, but to prepare for when the risk-models of bankers turn out to be wrong?

In case you wonder what possible credential would I have to dare to call out the bluff of the Financial Stability Board, let me just put forward, as one of many, that as an Executive Director of the World Bank, in a written statement delivered in October 2004, I warned that “We believe that much of the world’s financial markets are currently being dangerously overstretched though an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.”

Leaders of the G20. It is your duty to stop the nonsensical and extremely risky risk-aversion of the Basel Committee for Banking Supervision and the Financial Stability Board. Our children and grandchildren deserve it.

Finance ministers of the world. How many of you believe risk-aversion is good for the economy? Raise your hands!