How do you regulate a regulator’s algorithm?

Sir, I refer to your opinion “Want to regulate ‘the algorithm’? It won’t be easy” Washington Post December 3, 2021, in which you discuss the thorny issue of how to regulate social media in general and Facebook in particular.

Regulators, like the Federal Reserve, de facto also use an algorithm, the risk weighted bank capital requirements. This one determines how much capital/equity banks need to hold and, by its incentive of allowing more or less leverage of bank capital, influences how credit is allocated to the economy.

Let me list a few of too many worrisome aspects of that algorithm:

That what’s perceived as risky is more dangerous to bank systems than what’s perceived as safe

That bureaucrats know better what to do with taxpayer’s credit than e.g.., entrepreneurs with theirs.

That banks should refinance much more our “safer” present than finance our children’s and grandchildren’s’ “riskier” future.

That residential mortgages should be prioritized over small business loans.

How did we get there? My briefest answer: Groupthink by deskbound members of a mutual admiration club. Anyone who has walked on main-streets would e.g., understand that the real risks are conditioned to how risks are perceived, signifying assets can become very risky by the sole fact of being perceived very safe.

John A. Shedd, in “Salt from my attic” 1928 wrote: “A ship in harbor is safe, but that is not what ships are for”. Sir, I submit that goes for banks too. Try to ask current regulators about the purpose of our banks.

PS. IBM, we need our bank regulators to be helped by your Watson.

PS. Rachel Siegel wrote on December 3 “Biden’s pledge to bring ‘new diversity’ to Federal Reserve to soon be tested” I just hope the true meaning of diversity is really understood.

To help moor (my) inflationary expectations, get rid of what facilitates it.

Paul Volcker, in his autography “Keeping at it”, penned together with Christine Harper in 2018, wrote: “The assets assigned the lowest risk [in 1988], for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages… The American ‘overall leverage’ approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities."

Washington Post, in reference to your “Do not underestimate inflation” November 11 let me assure you that, just as lower bank capital requirements against residential mortgages fuels house prices; lower bank capital requirements against Treasuries, by artificially lowering the interest rate on these, sooner or later, are bound to facilitate those excessive injections of liquidity that fuels inflation.

I’m not an expert on the US Constitution, I’m not even an American citizen, but I cannot understand how Section 8’s "The Congress shall have the power to borrow Money on the credit of the United States" could be read as to include the assistance of a Federal Reserve quantitative easing; and bank capital requirements with risk weights: 0% the Federal Government, 100% We the People.

If I had a chance to be heard by the Fed, here’s a Basel IV I would suggest

PS. Fight inflation, from bottom up! Injecting liquidity while banks obtain higher risk adjusted returns on equity with Treasuries & residential mortgages (carbs) than with loans to small businesses & entrepreneurs (proteins), that favors demand over supply, something which can only help to inflate inflation.

PS. To top it up, are we really sure that the inflation that's pursued is the inflation that matters?

@PerKurowski

But with questions that shall not to be heard, courage might not suffice

“A lot of people want to convince you that you need a Ph.D. or a law degree or dozens of hours of free time to read dense texts about critical theory to understand the woke movement and its worldview. You do not. You simply need to believe your own eyes and ears.”

So begins Bari Weiss’ “We Got Here Because of Cowardice. We Get Out With Courage… Say no to the Woke Revolution”

Indeed: 

We should need nothing of that sort in order to understand that… risk weighted bank capital requirements based on that what’s perceived as risky is more dangerous to our bank systems than what’s perceived as safe, is as wrong/as woke as can be.

2004, Basel II assigned to the safest of the perceived safe, a risk weight of 20% and, to the riskiest of the perceived risky, a risk weight of 150%... Translating into a Basel II capital requirement of 1.6.% for the safest and 12% for the riskiest... Meaning banks were allowed by their regulators to leverage their capital 62.5 with assets some few human fallible credit rating agencies consider to be the safest, and 8.3 times with what these agencies consider to be the riskiest.

Should we really agree with that those excessive exposures that could become risky for bank systems are more built up with assets rated below BB- than with assets rated AAA? Does it not suffice to remember the 2008 global financial crisis?

We should need nothing of that sort in order to understand that… decreed risk weights of 0% the government and 100% citizens, de facto implies that bureaucrats know better what to do with credit for which repayment they’re not personally responsible for than e.g., small businesses and entrepreneurs. 

Should we agree with such statism/communism/fascism?

We should need nothing of that sort in order to understand that… allowing banks to leverage more their capital with some assets than others, make it easier for them to obtain a higher risk adjusted return on equity with some assets than with other. 

Should we agree with such in distortion of the allocation of bank credit?

We should need nothing of that sort in order to understand that… those less creditworthy already get less credit and pay higher interest rates.

Should we agree with bank regulations that declare the less creditworthy to also be less worthy of credit?

We should need nothing of that sort in order to understand that… … and on this issue I could go on and on… like wondering why the Academia says nothing. Might it be an Inquisition has declared questions on this issue shall not be heard?

My questioning began decades ago

PS. My 1999 Op-Ed in which, like Bari Weiss, I quote Arthur Koestler. “I automatically learned to classify all that is repugnant as an »inheritance from the past», and all that is attractive as the »seed of the future». With the aid of this automatic classification it was still possible for a European in 1932 to visit Russia and continue to be a communist.”

The confession of a regulatory hit man… one that shall not be heard.

Paul Volcker, in his autography “Keeping at it”, penned together with Christine Harper in 2018, wrote: “The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages… The American ‘overall leverage’ approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities."

What does that mean? It means exactly, no way around it, that if banks needed to hold as much capital against government securities and residential mortgages than what they were required to hold against e.g., loans to small businesses and entrepreneurs, banks would either hold less governments securities or residential mortgages or require higher interest rates on that… which also translates into banks holding more loans to small businesses and entrepreneurs at lower interest rates.

Volcker referred therein to 1988 Basel I regulations’ risk weighted bank capital requirements, but that remains totally applicable to Basel II and Basel III.

Thirty-three years without free-market set interest rates in the Western world, and I believe not one single Nobel Prize in Economic Sciences winner, or reputable or disreputable PhD anywhere, or distinguished journalist, has referred to this. Could it be that risk weights 0% government, 40% residential mortgages have created such a strong alliance between statists/communists and home owners, that the 100% risk weighted citizens stand no chance.

With banks giving too much credit at too low rates to what’s perceived or decreed as safe, where do you think this will all end? Have a guess. 

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

https://subprimeregulations.blogspot.com/2018/12/september-2-1986-was-tragic-night-when.html

https://subprimeregulations.blogspot.com/2013/01/the-subsidized-risk-free-rate.html

https://subprimeregulations.blogspot.com/2020/12/small-businesses-like-restaurants.html

https://subprimeregulations.blogspot.com/2004/11/some-of-my-early-public-opinions-on.html

https://perkurowski.blogspot.com/2005/07/perkins-confessions-rough-book-tour-is.html

“NOISE” defines me as noisy. I've got no problem with that.

Reading “Noise: A Flaw in Human Judgment" by Daniel Kahneman, Olivier Sibony and Cass R. Sunstein

Noise: “People who make judgments behave as if true value exists, regardless of whether it does. The think and act [as besserwissers] as if there were an invisible bull’s eye at which to aim, one that they and others should not miss by much”

Me: The Basel Committee’s risk weighted bank capital requirements, based on that what’s perceived as risky being more dangerous to our bank systems than what’s perceived (or decreed) as safe, is a pure and unabridged baseless judgment, held by Monday Morning Quarterbacks.

Noise: “Bias exist when most errors in a set of judgments are in the same direction”

Me: 2004, Basel II’s risk weights of 20% for what human fallible credit ratings agencies have assigned a AAA to AA rating, and 150% for assets assigned a below BB-rating, is clearly the previous judgement was set on steroids, by an ex-ante runaway risk aversion.

Noise: “Eliminating bias from a set of judgments will not eliminate all error. The errors that remain that remain when bias is removed are not shared. They are unwanted divergency of judgments, the unreliability of the measuring instrument we apply to reality. They are noise.” 

Me: So, I who for decades have been convinced of that what’s perceived (or decreed) as safe is much more dangerous to our bank system than what’s perceived as risky, seem to have been declared here, as pure unadulterated noise.

Be that so, for my grandchildren’s sake, I'll keep on being as noisy as can be.

The Basel Committee's Bank Credit Principles

Bureaucrats know better what to do with credit than entrepreneurs

Better refinancing the safer present than financing the riskier future

Residential mortgages are more important than small business loans

The more creditworthy are also much more worthy of credit

Are indeed as noisy as noise can be

PS. Would Daniel Kahneman have been awarded the Nobel Memorial Prize in Economic Sciences if Sveriges Riksbank had known how much his 2011 “Thinking, fast and slow” helps explain how stupid their risk weighted bank capital requirements are?

P.S. After titling my book “Voice and Noise” I found an article by Ingo R. Titze, Ph.D., in the Journal of Singing titled “Noise in the Voice”. It argued “A little noise, turned on at the right time, can go a long way toward enlarging the interpretive tool”. It reassured me a lot.

PS. My 2019 letter to the Financial Stability Board 

PS. Here, how my noise on bank regulations began

A much-needed and much overdue conference

John A. Shedd, in his 1928 “Salt from my attic” wrote: “A ship in harbor is safe, but that is not what ships are for”. 

Does that not apply to banks too?In his autobiography “Keeping at it”, penned together with Christine Harper in 2018, Paul Volcker, the Chair of the Federal Reserve from August 1979 to August 1987, with respect to the credit risk weighted bank capital requirements approved in 1988 and which are known as Basel I, valiantly confessed:

“The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages… The American ‘overall leverage’ approach had a disadvantage as well in the eyes of shareholders and executives focused on return on capital; it seemed to discourage holdings of the safest assets, in particular low-return US government securities."

Allowing banks to leverage much more with Treasuries and residential mortgages, which means it is easier for them to obtain satisfactory returns on equity with these assets, made it of course much harder for the “risky” e.g., small businesses and entrepreneurs to compete for credit. They now get less credit or pay higher interest rates than in absence of these regulations. Direct results? More government debt, higher house prices and less private sector jobs/incomes.

The harsh truth is that with the risk-weighting, the Fed decreed the less creditworthy to also be less worthy of credit, and that banks financing or refinancing the “safer” present would have priority over their financing the riskier future. 

An even harsher truth is that, in terms of financial stability, it’s all for nothing… even counterproductive. All the excessive exposures that could lead to major systemic bank crises, have always been built-up with what’s perceived as safe, never ever with what’s perceived as risky.

Who is going to pay by far the most for all the consequences? Our children and grandchildren.

“Where would America, the Home of the Brave be, if the credit risk averse bank regulations had not been introduced?”, is that not a question that merits a conference transmitted live on prime time? 

Why has it not taken place yet? Thirty-three years of silence clearly evidences this is not a red or blue issue and, sadly, violet is so out of fashion.

Why does your paper/organization sponsor such a conference?

Zero dividends, buy-backs and big bonuses, before banks have ten percent in capital against all assets

We urgently need our banks to be banks again

Current bank capital requirements, with capital meaning equity, meaning the skin in the game bank shareholders should have, are mostly based on perceived credit risks; not on misperceived risks, or the unexpected, like a Covid-19.

That would be less of a problem, if those capital requirements were based on risks conditioned to how credit risks are perceived.

But they’re not! What’s perceived more creditworthy, meaning what’s preferred by banks, have much lower capital requirements than what’s perceived less creditworthy.

And lower capital requirements mean higher leverages, making it therefore easier to earn risk adjusted returns on equity with what’s perceived (or decreed by regulators) as safe, than with what’s perceived as risky.

The consequence? A procyclicality that fosters higher and higher exposures to what’s safe, against less and less capital.

And what’s defined as “safe”? Loans to sovereigns, residential mortgages and assets with very high credit ratings?

And what’s risky? E.g., loans to small businesses and entrepreneurs.

So precisely like in 2007-08, when banks were caught with their pants down because of huge exposures to mortgage-backed securities with misperceived AAA ratings, they’re now standing there naked because of the unforeseen economic consequences of Covid-19; especially those derived from lockdowns.

The procyclicality of it all; when times are rosy banks can hold little capital but when times get hard banks have a hard time raising capital, sets us up to the fact 

And so, just when we now most need banks to help us out, it’s the hardest for them to raise the capital that would allow them to do so. What a mess!

And on all that the Academia has for decades kept total silence.

So, what would I propose? In few words, the following: 

“Banks, you can now hold zero capital, but that comes with: zero dividends, zero buy-backs and zero bonuses until you have ten percent in capital against all assets; and until you’ve paid back, including a reasonable interest, all what central banks or taxpayers have assisted you with.”

To ease the transition one could allow all bank assets incorporated some months before the change, to be held, until its maturity, against the capital requirement valid when put on banks' balances.

And I would allow small investors to buy some of that bank equity that helps these meet that ten percent requirement on favorable conditions… so as to connect the banks with the citizens again

Fellow citizens, let’s rescue our banks from hands of those financial engineers concerned with “how much can we leverage this asset?”, so as to put these back into hands of loan officers whose first question to applicants is, “what are you going to use the money for?”

And let’s rescue banks from that statism/communism/fascism implied with risk weights of 0% the Government, 100% the citizens… all as if bureaucrats/politicians know better what to do with credit for which repayment they’re not personally responsible for, than e.g., entrepreneurs.

Let’s be clear. Risk taking is the oxygen of all development and so, in that vein, for the real economy what’s “safe” represents carbs, while what’s “risky”, proteins and vitamins.

God make us daring!

And finally let’s stop putting financial instability on steroids. The large dangerous exposures that could become dangerous for our bank systems are always built up with what’s perceived as safe, never ever with what’s perceived risky. 

For the record, most of the "zero-zero-zero-ten percent" idea is inspired in how Chile so intelligently managed their huge 1981-1983 bank crisis.

Give it a thought, the newspaper you read; would it dare to publish a Galileo-heliocentric opinion and risk being confronted by the Basel Inquisition?

More on Chile: https://ideas.repec.org/p/wbk/wbrwps/300.html

My 2019 letter to the Financial Stability Board

Could/would an Inquisition Tribunal nominate as a Nobel Prize winner in Physics, someone arguing a heliocentric world?

Why do I ask?

The Nobel Memorial Prize in Economic sciences is officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The Governor of Sveriges Riksbank since 2006, is Stefan Ingves, and who, from 2011 to 2019 served as the Chairman of the Basel Committee on Banking Supervision. 

And the Church of the Basel Committee holds, as a dogma, with their credit risk weighted capital requirements, that even though never ever have those excessive exposures that caused bank crises been built up with what’s perceived as risky, but always with what was perceived as safe, that what is really dangerous to our bank systems, is what’s perceived as risky, or what has not been decreed by them as being very safe... like loans to governments.

So, could an economist who argues that what’s perceived as safe is much more dangerous to our bank systems than what's perceived as risky be nominated to such a Nobel Memorial Prize in Economic sciences?

You tell me.

My 2019 letter to the Financial Stability Board

PS: My recent chat with ChatGPT – OpenAI on the subject of geocentric vs heliocentric bank regulations.

Where would the Home of the Brave be, if all its immigrants had been met by risk-adverse bank regulations?

In his Washington Post May 27 op-ed, “Subsidizing America’s most important product," George F. Will referred to “Joseph Schumpeter an immigrant from Austria” whose theory was that “the principal drivers of social dynamism are… innovators — inventors of new things and companies” and added that “The common denominator [of it] is the restless, risk-taking spirit of a talented few.”The de facto spirit of the risk weighted bank capital requirements in the United States can currently be summarized in the following way: 

“We regulators allow you banks to leverage your capital a lot, and therefore earn high risk adjusted returns on equity, with what’s safe, e.g., Treasuries and residential mortgages. But, as a quid pro quo, you need to stay away from what’s risky, e.g., small businesses and entrepreneurs”

So, let me ask: Where would the Home of the Brave be if all its immigrants had been met by such regulatory risk adverseness?

PS. Not the first time I have asked myself that question.

PS. John Kenneth Galbraith wrote: “For the new parts of the country [USA’s West] … there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business... [jobs created]. “Money: Whence it came where it went” 1975

PS. And at the World Bank I argued time and time again: “There’s a clear need for an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth.”

PS. God make us daring!

PS. And, to top it up, in The Land of the Free, that risk aversion came hand in hand with outright statism

On the morality of current banker's decisions

A banker confronts a choice:

On one hand, Alt. A, a number of not so creditworthy borrowers who are asking for small loans, accepting to pay what could rightly be deemed a bit higher interest rate than what the risk adjusted interest rate should be.

On the other hand, Alt. B, a very creditworthy borrower, that is asking for a very large loan, at a rate lower than what an adequate risk adjusted interest rate should be.

Years ago, the banker would gladly gone for Alt. A, but, after the introduction of risk weighted bank capital requirements, which mean banks can leverage much more with what’s more creditworthy than with what’s less so, means the bank would obtain a higher risk adjusted return on its equity with Alt. B.

A banker has to pick Alt B. or he’s toast… and so he picks it… (that is unless he would not want to be a banker any more… and instead, like George Banks, go and fly a kite)

In reference to Per Bylund’s twitter thread on “morality of actions”, how would you classify the banker’s action.

Bank regulators, please wake up, being more creditworthy, should not mean, as you have decreed, being also deemed more worthy of credit.

Anyone deemed more creditworthy in terms of representing less risk of default will, by definition, get more credit and on better terms (like lower risk adjusted interest rate) than anyone deemed to be less creditworthy.

But if banks are allowed to leverage their equity more with the more creditworthy, and can so easier earn higher risk adjusted returns on equity, that does also imply these borrowers to be more worthy of credit than the less creditworthy… and that’s as wrong and dangerous as can be, for the bank system and for the real economy... and in reality, that's even immoral.

The wealthy are usually creditworthy, but they not more worthy of credit than the “riskier” poor. The risk weighted bank capital requirements, wrongly and immorally, Decreed Inequality.

A government is (at least in the short run) quite often very creditworthy, but it is not more worthy of credit than its citizens, as the risk weighted bank capital requirements so wrongly decree.

A house buyer is often creditworthy, but he is not more worthy of credit than e.g., small businesses and entrepreneurs, as  the risk weighted bank capital requirements so wrongly decree.

A house buyer with a larger down-payment, a lower loan to value LTV, is more creditworthy, but he is not more worthy of credit than a riskier house buyer providing a smaller down-payment, a higher LTV, as the risk weighted bank capital requirements so wrongly decree.

A developed nation is (at least in the short run) quite often very creditworthy, but it is not more worthy of credit than riskier developing nations, as the risk weighted bank capital requirements so wrongly decree.

A federal government is (at least in the short run) quite often very creditworthy, but it is not more worthy of credit than riskier local governments, as the risk weighted bank capital requirements so wrongly decree.

An AAA rated corporation is credit creditworthy, but it is not more worthy of credit than a much riskier below BB- rated one, as the risk weighted bank capital requirements so wrongly decree.

And I could go on and on

What would America's Founding Fathers say?

My 2019 letter to the Financial Stability Board FSB

 

Do the risk weighted bank capital requirements make the risky more or less risky?

Basel III’s bank capital requirement’s risk weights (RW) for residential mortgages depending on Loan to Value (LTV); implied Allowed Leverage of capital/equity (AL) and expected Return On Equity (eROE), calculated with a Risk Adjusted 0.5% expected Return on Asset (eROE) 

LTV<50%: RW = 20%: AL = 62.5 to 1: eROE = 31%

50% < LTV ≤ 60%: RW = 25%: AL = 50 to 1: eROE = 25%

60% < LTV ≤ 80%: RW = 30%: AL = 41.7 to 1:  eROE = 21%

80% < LTV ≤ 90%: RW = 40%: AL 31.25 to 1: eROE = 16%

90% < LTV ≤ 100%: RW = 50%: AL 25 to 1: eROE = 12%

LTV > 100%: RW = 70%: AL 17.9 to 1: eROE = 9%

Those with higher LTV, because they are riskier, must naturally pay banks higher risk adjusted interest rates. But, since banks can hold less capital against lower LTVs, they must also compensate banks, so as to provide these with a competitive risk adjusted return on equity.

So, in order for those who have no money to put down (LTV) > 100%, and with which banks can leverage 17.9 times, in order to compete with those who put down LTV <50%, need to provide an expected Risk Adjusted Return on Asset of 1.73 (31%/17.9); meaning in this case a 1.23% higher interest rate than without this distortion.

And we ask: charging those who have no money to put down, and who should perhaps not even have access to a residential mortgage, a 1.23% higher interest rate than what their risk adjusted interest rate would otherwise be, does that make these more or less risky?

Conclusion: The risk weighted bank capital requirements have, de facto, 0% to do with credit risk reduction, and 100% to do with risk generating distortions.

If race can be correlated to higher LTV mortgages, does this not de facto imply regulators are engaged in discrimination based on race?

Basel Committee... Good Job!

In that real very real class war between those who have houses as investment assets and those who just want affordable homes, where do you stand?

Being more creditworthy should not mean being more worthy of credit

And we must also ask, are the risk weighted bank capital requirements really in accordance with the spirit of the Equal Credit Opportunity Act (ECOA) or the Community Reinvestment Act (CRA)?

The risk weights are to access to credit, what protectionist tariffs are to trade, only more pernicious.

Why has Academia for decades kept silence on Basel Committee’s loony and dangerous risk weighted bank capital requirements?

My 2019 letter to the Financial Stability Board (FSB)

And the Academia kept silence.

Note: The Basel Committee’s use of the term “capital” in “risk weighted bank capital requirements” has sowed loads of confusions. Its real significance is “risk weighted bank shareholders’ equity/skin-in-the-game requirements". It has nothing to do with in what bank assets it’s invested.

Note: With the appearance ChatGPT – OpenAI, Academia will be asked much more on the why of its almost total silence on the outright dangerous bank regulations. Just wait until their peer reviewed papers get reviewed by #AI.

https://subprimeregulations.blogspot.com/2023/06/my-questions-to-chatgpt-openai-about.html

“A ship in harbor is safe, but that is not what ships are for”. John A. Shedd, 1928. Does that not apply for banks too?

For about 600 years banks allocated credit based on risk adjusted interest rates. After risk weighted capital requirements were introduced, they allocate it based on risk adjusted returns on regulatory equity (RORE). Huge distortions ensued! 

And the Academia kept silence.

The risk weighted bank capital requirements are based on perceived credit risks and not on risks conditioned to how bankers react to perceived risks. Clearly the regulators know nothing about conditional probabilities.

And the Academia kept silence.

To delegate so much of the determination of credit risk into the hands of some few human fallible credit rating agencies, had, almost by definition, to introduce into our banking systems, a dangerous systemic risk.
And the Academia kept silence.

Lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs

And the Academia kept silence.

Lower bank capital requirements for banks when financing the central government than when financing local governments, de facto implies federal bureaucrats know much better what to do with credit than local bureaucrats.

And the Academia kept silence.

Lower bank capital requirements for banks when financing residential mortgages, de facto implies that those buying a house are more important for the economy than, e.g. small businesses and entrepreneurs.

And the Academia kept silence.

Lower bank capital requirements for banks when financing the “safer” present than when financing the “riskier” future, de facto implies placing a reverse mortgage on the current economy and giving up on our grandchildren’s future.

And the Academia kept silence.

When outlook is rosy, investment grade abounds, banks can: hold little capital, leverage a lot, obtain high returns on equity, buy back lots of shares, pay lots of dividends and huge bonuses. When rain starts, junk grades appear… banks will stand naked.
And the Academia kept silence.

And all for nothing. Those excessive bank exposures that could be dangerous to our bank systems are always built-up with assets perceived or decreed as safe, and never ever with assets perceived as risky.

And the Academia kept silence.

Could it be that? “One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” George Orwell

The statist confession that shall not be heard

“Assets for which capital requirements were nonexistent, were what had most political support: sovereign credits. A simple ‘leverage ratio’ discouraged holdings of low-return government securities" Paul Volcker

And in the USA those risk weighted bank capital requirements seem to be unconstitutional

On the Nobel Prize: The Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences selects the Nobel prize winner in economic sciences. That prize was established by Sveriges Riksbank in 1968. The current Governor of said central bank, is Stefan Ingves who, from 2011 until 2019, served as the Chairman of the Basel Committee on Banking Supervision.

Could anyone arguing that what’s perceived as safe is much more dangerous to our bank system (heliocentric) than what’s perceived as risky (geocentric), be nominated for that prize by such a (Inquisition) committee? 

https://subprimeregulations.blogspot.com/2020/12/how-come-we-ended-up-with-stupid.html

Since we know all about risks, to make your banks safe, we regulators, we the Basel Committee, we give you our risk weighted bank capital requirements. And the Academia (desperately wanting to be counted among the Pigs on Orwell’s farm) kept silence.

http://perkurowski.blogspot.com/2023/05/has-orwells-big-brother-already.html

Five sad musings on the current bank regulations autocratically dictated by central bankers.

It is so hard for me to muster enough interest about central bankers’ monetary policies, while they make these so ineffective by imposing regulations that dangerously distort the allocation of bank credit.

“Credit risk weighted bank capital (equity) requirements” 

translates as 

“Worthy of credit allowed bank capital (equity) leverages”

Their lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs... and so are more worthy of it.

Their lower bank capital requirements for banks when financing the central government than when financing local governments, de facto implies federal bureaucrats know much better what to do with credit than local bureaucrats... and so are more worthy of it.

Their lower bank capital requirements for banks when financing residential mortgages, de facto implies that those buying a house are more important for the economy than, e.g. small businesses and entrepreneurs... and so are more worthy of it.

Their lower bank capital requirements for banks when financing the “safer” present than when financing the “riskier” future, de facto implies placing a reverse mortgage on the current economy and giving up on our grandchildren’s future.

And all that for nothing. Those excessive bank exposures that could be dangerous to our bank systems are always built-up with assets perceived or decreed as safe, and never ever with assets perceived as risky.

It’s despairing to see a Federal Reserve not understanding how these bank shareholders’ capital (equity) requirements distort the interest rates e.g., the risk-free rate.

Is all this in accordance to the U.S. Constitution? 

https://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

Might “availability heuristic” “availability bias” explain the loony risk weighted bank capital requirements?

According to Wikipedia:

"The availability heuristic, also known as availability bias, is a mental shortcut that relies on immediate examples that come to a given person's mind when evaluating a specific topic, concept, method or decision. The availability heuristic operates on the notion that if something can be recalled, it must be important, or at least more important than alternative solutions which are not as readily recalled. Subsequently, under the availability heuristic, people tend to heavily weigh their judgments toward more recent information, making new opinions biased toward that latest news.

The availability of consequences associated with an action is positively related to perceptions of the magnitude of the consequences of that action. In other words, the easier it is to recall the consequences of something, the greater those consequences are often perceived to be. Most notably, people often rely on the content of their recall if its implications are not called into question by the difficulty that they experience in bringing the relevant material to mind"

Could that explain why the world, so submissively, has accepted the regulators' bank capital requirements based on that those excessive exposures that could be dangerous to bank systems are built-up with assets perceived risky, and not with assets perceived as safe? 

Has the immediate example of the certainty of Monday Morning Quarterbacks, informing them about the awful consequences of what was very risky after the game, totally blocked regulators from even looking at what was considered as very safe before the game?

Richard Thaler
Cass Sunstein
Daniel Kahneman

PS. Here are other explanations