My voice and noise on subprime bank regulations: Fortune tellers’ bankers' bad-luck weighted capital/equity requirements for banks, would be better than the Basel Committee’s.

Wednesday, May 24, 2017

Fortune tellers’ bankers' bad-luck weighted capital/equity requirements for banks, would be better than the Basel Committee’s.

We have the Basel Committee’s risk weighted capital/equity requirements for banks. More ex ante perceived risk more capital/equity; less perceived risk less capital/equity.

These are loony. First, since it considers that was is already perceived as risky, is riskier for the bank system than what is perceived as safe; and second, because it distorts the allocation of bank credit to the real economy, hindering banks from the much needed financing of the riskier future, making them concentrate on refinancing the safer past and present.

Now, if we were to weigh the capital/equity requirements for banks based on the fortunetellers reading bankers' hands, to ascertain bankers' bad-luck, then we would at least have one capital/equity requirement against all assets; something that would at least not distort the allocation of bank credit to the real economy. And since this procedure would be based on bad-luck, and not on good luck, we could expect that capital requirement to be fairly high.

And if the fortune tellers got it all wrong, since they did not distort credit allocation, that would be less dangerous when compared to the credit rating agencies being wrong.

I challenge any of all current bank regulators to, in public, defend their risk weighting against that of my fortune tellers.

My opening question to them would be: What do you think of that Basel II assigned a risk weight of only 20% to the so dangerous AAA rated, and one of 150% for the so innocuous below BB- rated?

PS. Of course fortune tellers could be captured... but so can credit rating agencies be too.

PS. Now, what I would not suggest to do, is to allow big banks to use their own internal fortune tellers, as they currently use their own internal risk modellers to weigh the risks, and thereby set the capital/equity they are required to hold.

PS. Of course, if we land ourselves a fortune teller that wants to show-off, and for instance insists on that bad-luck depends on the day of the week a credit is approved, we better look for a less sophisticated one.

It's what bankers perceive as safe that's truly dangerous to our bank systems

The deafening noise of the Agendas

The fundamental reasons why it is so hard to advance the otherwise so easy explainable truth of this financial crisis, is because of the deafening noise of the Agendas…

On one side, we have the "progressives" who want to put all the blame on capitalistic banksters, and, on the other, the "conservatives" who want to blame the socialistic government sponsored enterprises GSEs of Fanny Mae and Freddy Mac.

For any of both sides accepting the fact that it was mostly a regulatory failure of monstrous proportions would seemingly be a highly inconvenient truth that would not help them to advance their respective agendas.

How can the Basel Committee be so dumb?

Systemic risks is about something that can become as big so as to threaten the system… and our bank regulators in the Basel Committee are incapable or unwilling to understand that what has the largest possibilities of growing as big so as to threaten the system is what is perceived as having little or no risk, not what is perceived as risky… which makes their first and really only pillar of their regulations, that of capital requirements of banks that are lower when perceived risks are lower… so utterly dumb!

This I published in November 1999... Read it!

The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of the OWB (the only bank in the world) or of the last financial dinosaur that survives at that moment.

Currently market forces favors the larger the entity is, be it banks, law firms, auditing firms, brokers, etc. Perhaps one of the things that the authorities could do, in order to diversify risks, is to create a tax on size.”

The deal!

Silly bank regulators!

What other word could describe a bank regulatory system designed exclusively to avoid bank crisis as if that is the only purpose of banking. You might just as well order the kids to stay in bed all life so as to diminish the risk of them tripping.

The minimum capital requirements of Basel that are based on default risks as measured by the credit rating agency amount to a dangerous tax on the risk, the oxygen of development.

Blindly focusing on default and leaving out any consideration that a credit with a low default risk but for a totally useless or perhaps even an environmentally dangerous purpose is much more risky for the society than a credit with a higher default risk destined to trying to help create decent jobs or diminish an environmental threat, is just silly.

But do I have to be disrespectful and call them silly? Well, individually perhaps they are not, but, as a group, bank regulators are so full of hot air that someone has to help them to puncture their cocoon balloon and let them out.

Breathe!

I’m going to third-pillar what?

By now the desperate bank regulators are throwing at us the third pillar of their Basel regulations which implies the need that we ourselves privately monitor our banks. Great, in my country, a couple of decades ago, I did just that and had a fairly good grip on whom of my banker neighbors were good bankers and whom to look out for.

But sincerely what am I supposed to do know when about 50 per cent of the retail deposits in my country are in hand of international banks (Spain) and that might be losing their shirt making investments in subprime mortgages in California?

What do we want from our banks?

Over the last two decades we have seen hundreds if not thousands of research papers, seminars, workshops conferences analyzing how to exorcize the risks out of banking; and if in that sense the bank regulation coming out from Basel was doing its job; and centred around words like soundness, stability, solvency, safeness and other synonyms. Not one of them discussed how the commercial banks were performing their other two traditional functions, namely to help to generate that economic growth that leads to the creation of decent jobs and the distribution of the financial resources into the hands of those capable of doing the most with it.

At this moment when we are suddenly faced with the possibilities that all the bank regulator’s risk adverseness might anyhow have come to naught, before digging deeper in the hole where we find ourselves fighting the risks, is it not time to take a step back and discuss again what it is we really want our commercial banks to do for us? I mean, if it is only to act as a safe mattress for our retail deposits then it would seem that could be taken cared of by authorizing them only to lend to the lender of last resort; but which of course would leave us with what to do about the growth and the distribution of opportunities.

My voice and noise on subprime bank regulations

Wednesday, May 24, 2017

Fortune tellers’ bankers' bad-luck weighted capital/equity requirements for banks, would be better than the Basel Committee’s.

Me and my constituency!!!

Me and my constituency!

Me and risks

A question to bank regulators

Universities!

The Paper!: L´economia castrata

In the Washington Post

In American Banker

In CITY A.M.

The Videos

Why don't bank regulators get it?

My huge problem!

The deafening noise of the Agendas

You tell me!

How can the Basel Committee be so dumb?

The stuff that bonuses are made of

What were they thinking?

Day by the day it is becoming more relevant... scary!

This I published in November 1999... Read it!

This I wrote, October 2004, as an Executive Director of the World Bank

Regulatory hubris

On bs.