The Basel Committee for Banking Supervision’s bank regulations vs. mine.

A tweet to: @IMFNews, @WorldBank, @BIS_org @federalreserve, @ecb @bankofengland @riksbanken @bankofcanada

"Should you allow the Basel Committee to keep on regulating banks as it seems fit, or should you not at least listen to other proposals?

Bank capital requirements used to be set as a percentage of all assets, something which to some extent covered both EXPECTED credit risks, AND UNEXPECTED risks like major sudden downgrading of credit ratings, or a coronavirus.

BUT: Basel Committee introduced risk weighted bank capital requirements SOLELY BASED ON the EXPECTED credit risk. It also assumes that what is perceived as risky will cause larger credit losses than what regulators perceive or decreed as safe, or bankers perceive or concoct as safe. 

The different capital requirements, which allows banks to leverage their equity differently with different assets, dangerously distort the allocation of bank credit, endangering our financial system and weakening the real economy.

The Basel Committee also decreed a statist 0% risk weight for sovereign debts denominated in its domestic currency, based on the notion that sovereigns can always print itself out of any problem, something which clearly ignores the possibility of inflation, but, de facto, also implies that bureaucrats/politicians know better what to do with bank credit they are not personally responsible for, than for instance entrepreneurs, something which is more than doubtful.

Basel Committee's motto: Prepare for the best, for what's expected, and, since we do not know anything about it, ignore the unexpected 

I propose we go back to how banks were regulated before the Basel Committee, with an immense display of hubris, thought they knew all about risks; which means one single capital requirements against all assets; 10%-15%, to cover for the EXPECTED credit risk losses and for the UNEXPECTED losses resulting from wrong perceptions of credit risk, like 2008’s AAA rated securities or from any other unexpected risk, like COVID-19.

My one the same for all assets' capital requirement, would not distort the allocation of credit to the real economy.

My motto: Prepare for the worst, the unexpected, because the expected has always a way to take care of itself.


PS. My letter to the Financial Stability Board
PS. A continuously growing list of the risk weighted bank capital requirements mistakes

PS. Risk-weights are to access to credit what protectionist tariffs are to trade, only more pernicious.

PS. I am no newcomer to this issue

September 2, 1986 was the tragic night when Paul A. Volcker, in London, gave in to (insane) European bank regulators.

Paul A. Volcker in his autography “Keeping at it” of 2018, penned together with Christine Harper, valiantly accepted that the risk weighted bank capital requirements he helped to promote, had serious problems. In pages 146-148 he writes:

"The travails of First Pennsylvania and Continental Illinois, the massive threat posed by the Latin American crisis, and the obvious strain on the capital of thrift institutions had an impact on thinking over time, but strong action was competitively (and politically) stalled by the absence of an international consensus.

An approach toward dealing with that problem was taken by the G-10 central banking group meeting under the auspices of the Bank for International Settlements (BIS) headquartered in Basel, Switzerland. A new Basel Committee would assess existing standards and practices in a search for an analytic understanding.

Progress was slow… 

The US practice had been to asses capital adequacy by using a simple “leverage ratio”-in other words, the bank’s total assets based compared with the margin of capital available to absorb any losses on those assets. (Historically, before, the 1931 banking collapse, a ten percent ratio was considered normal)

The Europeans, as a group, firmly insisted upon a “risk-based” approach, seemingly more sophisticated because it calculated assets based on how risky they seemed to be. They felt it was common sense that certain kind of assets –certainly including domestic government bonds but also home mortgages and other sovereign debt- shouldn’t require much if any capital. Commercial loans, by contrast, would have strict and high capital requirements, whatever the credit rating might be.

Both approaches could claim to have strengths. Each had weaknesses. How to solve the impasse?

At the end of a European tour in September in 1986, I planned to stop in London for an informal dinner with the Bank of England’s then governor Robin Leigh-Pemberton. In that comfortable setting without a lot of forethought, I suggested to him that if it was necessary to reach agreement, I’d try to sell the risk-based approach to my US colleagues.

Over time, the inherent problems with the risk-based approach became apparent. 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. Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011. 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."

September 2? From here


I ask: Insane? I answer: Absolutely! 

How can one believe that what bankers perceive as risky is more dangerous to bank systems than what bankers perceive as safe? 

Should it not be clear that dooms our bank system to especially severe crises, resulting from excessive exposures the what ex ante is perceived as especially safe, but that  ex post might not be, against especially little capital?

These self-nominated besserwisser experts had (have) just not the faintest understanding of conditional probabilities.

Here a list of the many mistakes with the risk weighted bank capital requirements

To top it up 1988's Basel I assigned the sovereigns a 0% risk weight and citizens 100%, as if bureaucrats know better what to do with credit for which repayment they're not personally responsible for than entrepreneurs. 

Current bank regulators should undergo a psychological test. They clearly seem to be afflicted by “false safety behavior”

I extract the following from “False Safety Behaviors: Their Role in Pathological Fear” by Michael J. Telch, Ph.D. 

“What are false safety behaviors? 

We define false safety behaviors (FSBs) as unnecessary actions taken to prevent, escape from, or reduce the severity of a perceived threat. There is one specific word in this definition that distinguishes legitimate adaptive safety behaviors - those that keep us safe - from false safety behaviors - those that fuel anxiety problems? If you picked the word unnecessary you’re right! But when are they unnecessary? Safety behaviors are unnecessary when the perceived threat for which the safety behavior is presumably protecting the person from is bogus.”

The risk weighted capital requirements for banks, more perceived risk more capital – less perceived risk less capital, fits precisely that of being unnecessary. If a risk is perceived the banker will naturally take defensive measures, like limiting the exposure or charging higher risk premiums. If there is a real risk that is of the assets being perceived ex ante as safe, but turning up ex post as risky.

The consequences of such false safety behavior by current bank regulators are severe:

They set banks up to having the least capital when the most dangerous event can happen, something very safe turning very risky. 

Equally, or even more dangerous, it distorts the allocation of bank credit to the real economy, it hinder the needed “riskier” financing of the future, like entrepreneurs, in order to finance the “safer” present, like house purchases and sovereigns.

It creates a false sense of security because why should anyone really expect that “experts” picked the wrong risks to weigh, the intrinsic risk of the asset, instead of the risk of the asset for the banking system.

I quote again from the referenced document:

“How do false safety behaviors fuel anxiety? 

There seems to be a growing consensus that FSB’s fuel pathological anxiety in several different ways. One way in which FSBs might do their mischief is by keeping the patient’s bogus perception of threat alive through a mental process called misattribution. Misattribution theory asserts that when people perform unnecessary safety actions to protect themselves from a perceived threat, they falsely conclude (misattribute) their safety to the use of the FSB, thus leaving their perception of threat intact. Take for instance, the flying phobic who copes with their concern that the plane will crash by repeatedly checking the weather prior to the flight’s departure and then misattributes her safe flight to her diligent weather scanning rather than the inherent safety of air travel.” 

In this respect stress tests and living wills could perhaps be identified as “unnecessary safety actions” the “checking of the weather”. 

Finally: “FSBs may fuel anxiety problems by also interfering with the basic process through which people come to learn that some of their perceived threats are actually not threats at all…threat disconfirmation…For this important perceived threat reduction process to occur, not only must new information be available but it also must be processed.”

The 2007/08 crisis provided all necessary information on that the risk weighting did not work, since all bank assets that became very problematic, had in common low capital requirements since they were perceived as safe. And this information has simply not been processed.

Conclusion, I am not a psychologist but given that our banking system operates efficiently is of utmost importance, perhaps a psychological screening of all candidates to bank regulators should be a must. Clearly the current members of the Basel Committee and of the Financial Stability Board, and those engaged with bank regulations in many central banks, would not pass such test.

I feel sorry for them, especially after finding on the web someone referring to "anxiety disorder" with: “I don’t think people understand how stressful it is to explain what’s going on in your head when you don’t even understand it yourself”

PS. Here is a brief summary of the mistakes of the risk weighted capital requirements for banks.

  

Basel III - sense and sensitivity”? No! Much more “senseless and insensitivity”

I refer to the speech titled “Basel III - sense and sensitivity” on January 29, 2018 by Ms Sabine Lautenschläger, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the European Central Bank.

“Senseless and insensitive” is how I would define it. It evidences that regulators have still no idea about what they are doing with their risk weighted capital requirements for banks.

Ms Lautenschläger said: With Basel III we have not thrown risk sensitivity overboard. And why would we? Risk sensitivity helps align capital requirements with actual levels of risk and supports an efficient capital allocation. It prevents arbitrage and risk shifting. And risk-sensitive rules promote sound risk management.

“Risk sensitivity helps align capital requirements with actual levels of risk and supports an efficient capital allocation” No! The ex ante perceived risk of assets is, in a not distorted market aligned to the capital by means of the size of exposure and the risk premium charged. Considering the perceived risk in the capital too, means doubling down on perceived risks; and any risk, even if perfectly perceived, if excessively considered causes the wrong actions.

“It prevents arbitrage” No! It stimulates arbitrage. Bankers have morphed from being diligent loan officers into too diligent equity minimizers. 

“It prevents risk shifting.” No! It shifts the risks from assets perceived as risky to risky excessive exposures to assets perceived as safe.

“It promote sound risk management” No! With banks that compete by offering high returns on equity, allowing some assets to have lower capital requirements than other, makes that impossible.

Ms Lautenschläger said: “for residential mortgages, the input floor increases from three basis points to five basis points. Five basis points correspond to a once-in-2,000 years default rate! Is such a floor really too conservative?”

The “once-in-2000 years default rate on residential mortgages!” could be a good estimate on risks… if there were no distortions. But, if banks are allowed to leverage more their capital with residential mortgages and therefore earn higher expected risk adjusted returns on residential mortgages then banks will, as a natural result of the incentive, invest too much and at too low risk premiums in residential mortgages… possibly pushing forward major defaults from a “once-in-2000 years default” to one "just around the corner". That is senseless! Motorcycles are riskier than cars, but what would happen if traffic regulators therefore allowed cars to speed much faster?

I guess Basel Committee regulators have never thought on how much of their lower capital requirement subsidies are reflected in higher house prices?

Then to answer: “Does this mean that Basel III is the perfect standard - the philosopher's stone of banking regulation? Ms Lautenschläger considers “What impact will the final Basel III package have on banks - and on their business models and their capital?”

Again, not a word about how all their regulations impacts the allocation of bank credit to the real economy… as if that did not matter… that is insensitivity!

Our banks are now financing too much the “safer” present and too little the “riskier” future our children and grandchildren need and deserve to be financed.

PS. In 2015 I commented another speech by Ms Lautenschläger on the issue of “trust in banks”.

The Basel Committee, FSB and other bank regulators know dangerously little about risks. Why? Here it is!

What many perceive as very safe can lead to the build up of very large exposures that could threaten the bank system.

What many perceive as very risky never leads to the build up such large exposures that it could threaten the bank system.

Yet the Basel Committee, in Basel II of 2004, assigned a risk weight of only 20% to what rated AAA to AA and therefore so dangerous to the banking system, and one of 150% to what is rated below BB- and therefore so innocuous to the banking system.

The Basel Committee has refused to explain why they did so, and the only document purported to explain it, is pure GroupThink mumbo jumbo.

Additionally, risk weighted capital requirements for banks allow banks to leverage their equity differently with different assets, which produces quite different expected risk adjusted returns on equity than would have been the case in the absence of such regulations, and therefore this dramatically distorts the allocation of bank credit to the real economy. It introduced rampant risk aversion that have our banks no longer financing the riskier future, only refinancing the safer past.

Additionally, without obtaining due permission, the Basel Committee assigned a risk weight of 0% to a set of friendly sovereigns and 100% for the We the People of such sovereigns. This introduced rampant statism. As if government bureaucrats could use bank credit better than the private sector.

I have tried by all means possible to get explanations from the Basel Committee, even by using their formal consultation procedures, but all to no avail.

Please, you in the media who have more access to bank regulators ask them: Why do you think the below BB- rated are more dangerous to the bank system than the AAA rated?

Have you never heard of Voltaire’s “May God defend me from my friends, I can defend myself from my enemies”?

We also have John A Shedd (1850-1926) with his: “A ship in harbor is safe, but that is not what ships are for.”

With respect to that the Basel Committee is not only not allowing our banks to sail to explore riskier but perhaps more profitable bays, but it is also assuring to turn safe havens into overpopulated death traps. 

For our children and grandchildren’s case, help me to get rid of those dangerously incapable regulators.

P.S. Like during the Oscar it seems that at the Basel Committee there was also a mix-up of envelopes, in this case of those containing the names of what is the most and the least risky for our bank system. The saddest fact is that at the Oscar they got it fast, 2 minutes and 30 seconds, but in Basel they have yet to discover it after more than a decade.

François Villeroy de Galhau, I don’t think you have earned the right to quote Ortega y Gasset

François Villeroy de Galhau, Governor of the Banque de France, when addressing The Asociación de Mercados Financieros Annual Financial Convention in Madrid on November 21, 2016 ends his “Europe facing a new political economy” by quoting José Ortega y Gasset, the famous Madrid-born philosopher:

“Life is a series of collisions with the future; it is not the sum of what we have been, but what we yearn to be”. 

Absolutely Mr Villeroy de Galhau. But what are we to say of bank regulators like you who with their risk weighted capital requirements, give banks great incentives to earn the highest risk adjusted returns on equity when refinancing the "safer" past and present, so as to make them stay away from any collision resulting from financing a "riskier" future.

Why such hullabaloo about Trump’s at view of everyone conflicts of interest, while ignoring the bank’s hidden ones?

We all know that Trump is going to be subject to so much scrutiny that his “conflicts of interest” might even suffer. 

But on the large banks’ outrageous conflicts of interest, namely being able to use their own models to partially determine the capital they need to hold, on that everyone keeps mum. Why?

The lower the risk is calculated, the lower is the capital requirements, the higher is the allowed leverage, and so the better are the banks perspectives on obtaining high risk adjusted returns on equity. If that’s not a mother of a conflict of interest what is?

William C Dudley, Fed New York, does still not understand how risk-weighted capital requirements for banks distort

On March 31, 2016 William C Dudley of the Federal Reserve Bank of New York, gave a speech titled “The role of the Federal Reserve – lessons from financial crises” 

There are many issues I do not agree with in that discourse but let me here concentrate on “lessons from financial crisis”. 

Mr Dudley stated: “The crisis showed that the regulatory community did not fully grasp the vulnerability of the financial system. In particular, critical financial institutions were not resilient enough to cope with large scale disruptions without assistance, and problems in one institution quickly spread to others.”

Not a word about how the risk-weighted capital requirements for banks; which permit banks to leverage more on what is perceived, or has been decreed, or has been concocted as safe, than with what is perceived as risky; which means banks earn higher risk adjusted returns on equity on what is "safe" than on what is “risky”; which means banks will lend too much to what is “safe”, like sovereigns and the AAArisktocracy, and too little to what is “risky”, like SMEs and entrepreneurs.

And anyone who has still not understood the dangers that distortion of the allocation of bank credit poses to the banks, and to the real economy, doest not have what it takes to work on bank regulations.

The main lesson here is: It was the regulators who, by allowing banks to hold less capital against precisely the stuff that all major bank crisis are made of, namely what is ex ante perceived as safe, made the banking sector more vulnerable.

Wake up! Our banks are regulated by highly unprofessional technocrats; all members of a small mutual admiration club

Could there be something more dangerous to the real economy, and to banks, than distorting the allocation of credit? Not really.

And yet that is what the current batch of bank regulators did, without even considering that possibility a factor. They did not even care about it.

They imposed risk weighted capital (equity) requirements for banks. More ex ante perceived risk more capital – less risk less capital.

With that they allowed banks to leverage their equity more when lending to ”the safe” than when lending to ”the risky”.

With that they caused banks to be able to earn higher risk adjusted returns on equity on assets perceived as safe than on assets perceived as risky.

And so of course the banks are lending more than normal to those who already had easier and cheaper access to bank credit, ”The Safe”, like the sovereigns (governments) and members of the AAArisktocracy.

And so of course banks are lending less and relatively more expensive than usual to those who already found it harder and more expensive to access bank credit, ”The Risky”, like the SMEs and entrepreneurs.

And you ask how the hell did this happen? There are many explanations but the most important one was that they regulated without even asking themselves what was the purpose of those banks they were regulating.

And if that is not unprofessional what is?

“A ship in harbor is safe, but that is not what ships are for” John Augustus Shedd, 1850-1926

And to top it up they have not made our banks safer, since never ever do major bank crises result from excessive exposures to something perceived risky, these always result from excessive exposures to something perceived or deemed to be safe when booked... you see even the safest harbor can become dangerously overpopulated.

We must rid ourselves from these lousy and already very proven failed bank regulators. Urgently!

If earth suffers an immediate threat to its existence, let us pray bank regulators are not part of our first response team.

In 1988 the Basel Accord (Basel I), for the purpose of determining the capital requirements of banks, introduced the ludicrous out of this world concept of a zero percent weight for the sovereigns and a 100 percent weight for the private sector.

That could only have the effect of banks lending more and in better terms to the sovereign than to that private sector that usually is from which the sovereign gets its strength; and which implied bank regulators thought that government bureaucrats could use bank credit more efficiently than for instance SMEs and entrepreneurs. Unless one is a full-fledged statist or a communist, such a concept should have been totally unacceptable.

Myself, coming from being a corporate financial consultant primarily in Venezuela, had very little to do with bank regulations but, in 2004, when I was just awakening to what the Basel regulations contained, in a letter that was published in the Financial Times I wrote: “We wonder how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

But now soon 30 years after that initial Basel Accord correcting that zero risk weighting flaw seems finally to have come up on a decision agenda.

In March 2011 the issue appeared at a roundtable of the IMF which concluded with José Viñals, IMF Financial Counselor and Director of Monetary and Capital Markets Department, stating: “The emphasis put by the panelists on issues such as the interconnectedness between sovereigns and banks, regulation and its impact on financial risk, the need for joint and credible sovereign-bank stress testing, debt issuance strategies, and the role of the central banks in mitigating liquidity versus credit risk have clearly demonstrated the need for us to look at sovereign risk in a much broader context of issues and vulnerabilities than we have done so far.” 

And then it pops up in October 2011, in a speech by Hervé Hannoun the Deputy General Manager Bank for International Settlements titled “Sovereign risk in bank regulation and supervision: Where do we stand?” Hannoun, first things first, clears regulators from any responsibility: “market participants’ complacent pricing and accumulation of sovereign risk in the decade up to 2009 was a market led phenomenon that cannot be attributed to the Basel standards.” But then he anyhow opines: “However it becomes crucial for regulators and supervisors of large banks to clarify that although sovereign assets are still a relatively low risk asset class, they should no longer be assigned a zero risk weight and must be subject to a regulatory capital charge differentiated according to their respective credit quality." That said he finally returns to the original sin stating:"A key objective for governments in advanced economies is to earn back the quasi-risk-free status of their debt"

Also the then General Secretary of the Prudential Supervisory Authority of Banque de France, Danièle Nouy in April 2012 wrote: “it appears that current regulatory framework does not require from financial institutions to hold significant regulatory capital against sovereign risk, inadequately assuming sovereign debt as a low-risk and even a risk-free asset class. Furthermore, some regulatory initiatives, while globally enhancing standards, could create further incentives to encourage financial institutions to hold sovereign debt. In addition to considering better reflection of sovereign risk in financial regulation, supervisory practices also appear as a crucial tool to address the issue of heightened sovereign risk and its potential impact on financial stability.” 

And in a speech delivered on May 5, 2015 Stefan Ingves, the current chair of the Basel Committee wrote: “A discussion of the risk-weighted capital framework would not be complete without a discussion of the Committee's work on sovereign risk… the Basel Committee's oversight body - agreed to initiate a review of the existing regulatory treatment of sovereign risk, including potential policy options... I think we can all agree that there is no such thing as a risk-free asset. When we talk about this issue we talk about ‘sovereign-risk’ - not about ‘sovereign risk-free’”

And Jens Weidmann, the President of the Deutsche Bundesbank in a speech on December 10, 2015 titled “A central banker’s take on improving the euro area’s stability” “While bail- outs and monetary financing are prohibited under the Maastricht treaty, sovereign debt is nonetheless treated as risk-free in the capital regime for banks. Danièle Nouy, the chairwoman of the European banking supervision, said: ‘Sovereigns are not risk-free assets. That has been demonstrated, so now we have to react.’ I totally agree with her. Sovereign debt in banks’ balance sheets needs to be backed by capital, just as is the case for any private debtor. But perhaps it is even more important to put a lid on banks’ exposures to a single sovereign.” 

Oh boy, this all sure is in slow motion... in the getting it and in the reacting to it, I can only conclude in that if earth suffered an immediate threat to its existence I sure wish bank regulators are not part of our humans’ first response team.

Of course I wish for the statist/communist favoring of the bank borrowings of the sovereign to disappear but, because of the temporary huge bank capital scarcity that could produce, I must pray it is carried out in such a way that it does not further increase the squeeze on the access to bank credit of those in the private sector perceived as “risky”. They have it hard enough as it is.

And sadly, the current bunch of bank regulators have given us enough evidence they do not understand what banks are for. In fact they have never even defined the purpose of banks before regulating these... and how stupid is not that?

PS. November 2018: In Europe by means of the European Commission’s “Sovereign Debt Privilege”, the risk weight assigned to all Eurozone sovereign debtors is still 0%, this even when that debt is de facto not expressed in a domestic (printable) currency. Oh boy, this all sure is no motion at all.

PS. How would government finances look if house prices had not gone up the last decades?

This is the farmer sowing his corn,
 That kept the cock that crowed in the morn, 
That waked the priest all shaven and shorn,
 That married the man all tattered and torn,
 That kissed the maiden all forlorn, That milked the cow with the crumpled horn,
 That tossed the dog,
 That worried the cat,
 That killed the rat,
 That ate the malt
 That lay in the house that Jack built...That was taxed by the taxman

'

PS. My letter to the Financial Stability Board dated March 2019

The Basel Committee for Banking Supervision flagrantly violates the precautionary principle by turning a blind eye to the dangers.

The precautionary principle states that if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific consensus that the action or policy is not harmful, the burden of proof that it is not harmful falls on those taking an action.

I have for years denounced that the credit-risk weighted capital requirements for banks adopted by the Basel Accord as the pillar of their regulations seriously distort the allocation of bank credit to the real economy.

The consequences of too much bank credit to what is perceived as “safe” and too little credit to what is perceived is that banks do not any longer finance the risky future, our children and grandchildren need to be financed, but only refinance the safer past. With this the world is slowly but surely coming to a grinding halt.

But the Basel Committee, the Financial Stability Board, the European Commission on Banking and Finance, IMF, BIS, ECB, Fed, FDIC, BoE and all other relevant institutions just look away and do not want that issue discussed.

It sure is a flagrant violation of the precautionary principle that will cause immense damage. 

Please… help me break the silence of that irresponsible mutual admiration club!

A public letter to Mr. Stefan Ingves, the chair of the Basel Committee for Banking Supervision

Mr. Stefan Ingves.

There are cowards and there are braves, ranging from extreme cowards to stupidly foolish braves, but that has less to do with how these perceive risks, and much more to do with how they assume and manage risks.

And then there are those blind to risks… so blind they do not even see a credit rating.

The Basel Committee’s risk weighted capital requirements for banks, based on precisely the same perceived risks (credit ratings) that seeing banks can already see, have clearly been designed for blind bankers.

I do not know how many such blind bankers there are, and if they exist they should not even be allowed to be in business. But, your risk weighted capital requirements, sure poses a big problem for all other banks, and for the economy in general.

Since non-blind banks already clear for any perceived credit risk, by means of interest rates and size of exposure, to force them to again, now in the capital, clear for exactly the same perceived credit risk, gives credit risk perceptions a double weight.

And any perceived risk, even if perfectly perceived, if excessively considered, leads to the wrong action.

In the case all credit risk ratings were perfect… that would then mean banks would lend more than what they should, to what is perceived “safe”, and less than what they should, to what is perceived "risky". And that misallocation of bank credit must be bad for all, especially for the real economy.

Also if credit ratings indicate a “safe” asset to be safer than what it really is, then of course a bank could collapse. Indeed this is precisely the stuff all major bank crises have been made of. No crisis has resulted from too much exposures to something ex ante perceived as risky.

Of course, if a credit rating is imperfect, in the way of informing the asset to be less risky, or less safe, than what it really is, then you might have helped banks to nail it. I doubt though your intention was really to base it on credit ratings being adequately wrong.

Mr. Stefan Ingves, may I suggest the following?

For once think of the purpose of banks being that of allocating credit efficiently to the real economy; and then go back to the drawing board, to see what non-distortionary capital requirements for banks you can come up with.

While doing so, may I suggest you remember that the purpose of the capital requirements for banks, is to cover for some unexpected losses, and not like now, for the expected credit losses?

You could still use credit ratings, if that helps you to save face… but, instead of basing it until now on those credit ratings being correct, why not require banks to have for instance 8 percent of capital against all assets, based on the risks of credit ratings, and other risk perceptions, being wrong... and other risks like that of cyber-attacks.

Please Mr. Ingves... wake up! The risk with banks has nothing to do with the risk of their assets, and all to do with how they manage the risk of their assets… Don’t make it harder than it already is for banks to manage credit risks correctly.

Yours sincerely,

Per Kurowski

PS. Could you please send a copy of this letter to Marc Carney, the current chair of the Financial Stability Board? It could also be of interest  to BIS's Jaime Caruana, ECB's Mario Draghi, and Fed's Janet Yellen. 

Forget it, I at least trust banks and bankers much more than their current regulators.

I quote from a recent speech by Ms Sabine Lautenschläger, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism given September 28, 2015, titled Reintegrating the banking sector into society – earning and re-establishing trust 

"Ladies and Gentlemen, esteemed audience,

How can bankers regain the trust that was lost during the crisis? 

How can the banking sector be reintegrated into society? 

There is no doubt that banks, bankers and the whole industry are experiencing one of the worst crises of confidence ever. The turmoil of 2008 and 2009 played a major role in this loss of public trust, but the problem did not end after the most acute phase of the crisis. Even seven years later, confidence in the banking sector is still very low. 

Numerous scandals, like the manipulation of LIBOR rates…have reinforced the perception that wrongdoing is widespread in the banking sector. 

But mistrust is not only confined to banks themselves. Investors and clients also have less confidence in the correct functioning of the banking sector and in the ability of supervisors and regulators to prevent excessive risk-taking. 

We should worry about this loss of trust in the banking sector: 

   It impairs the proper functioning of banks to reallocate resources. 

   It hampers growth. 

   It leads to instability and costly crises. 

But how can trust in the banking sector be restored? Who are the key players in this process? Is it enough to reform the regulatory and supervisory framework, as we have done in recent years?

But are the efforts of regulators and supervisors enough? Can trust be rebuilt simply by having better and more credible rules? 

No! Rebuilding trust in the banking sector requires the active engagement of bankers and their stakeholders. Regulatory and supervisory reforms are necessary, but not sufficient to restore people’s trust in banks. 

My view is that, while regulatory reform and supervisory action were certainly necessary to lay the foundations on which banks can restore trust, regulators and supervisors are not the key players in this process."

My comments: 

Bank regulators told banks: “We allow you to hold much less capital against assets perceived as safe than against assets perceived as risky, so that you can earn much higher risk adjusted returns on equity when lending to the safe than when lending to the risky.

That’s it! Just avoid the credit risks and you earn more, not a word about a purpose for banks, like helping to generate jobs for the young or making the planet more sustainable. Anyone regulating without defining the purpose of what he is regulating is as loony as they come.

And to top it up, the regulators assigned a risk weight of zero percent to the sovereigns (governments) and of 100 percent to the citizens and private sectors on which that sovereign depends. Which means they believe government bureaucrats can use bank credit more efficiently than SMEs and entrepreneurs.

And of course those regulations distort completely the allocation of bank credit to the real economy and, by diminishing the opportunities of the risky to gain access to bank credit, increases inequalities.

The manipulation of Libor rates is pure chicken shit when compared to the manipulation of the credit markets done by regulators with their credit risk weighing.

And here many years after it was clearly seen that the regulators efforts to prevent excessive risk taking only produced excessive risk taking in what was perceived as safe, here they are still talking about the need of “the ability of supervisors and regulators to prevent excessive risk-taking”. Without their regulations banks would have never ever been able to leverage as much as they did.

So forget it, I at least trust banks and bankers much more than their current regulators.

Are these the bank regulators the world needs?

We central bank bureaucrats, we think government bureaucrats are much better at deciding whereto the savings of a society should be allocated, than what private bankers, SMEs and entrepreneurs are. 

And therefore we as bank regulators, government bureaucrats ourselves, have decided to launch the Basel Accord, that which allows banks to hold no equity when lending to the government but requires these to hold 8 percent in equity against any loan to the private sector.

This way we guarantee that whatever net margin our governments, our employers, pay our banks can be infinitely leveraged, so as to be able to produce the banks much higher risk adjusted returns on equity, than whatever returns banks can obtain when lending in fair terms to the private sector.

But of course, our only motivation, is to make banks safer :-)

Down with risky privates! Long live the infallible sovereigns! Government bureaucrats of the World unite!

July 1988: The Basel Capital Accord

PS. One of the benefits with this Accord is that all the subsidies our governments, our employers, are going to receive by having preferential access to bank credit, will not be identified as a tax. Another one is of course that markets will be seen perceiving us as much less risky than usual, which is good. Here among us, in our petit mutual admiration club, we often talk about “the subsidized risk-free rate”.

PS. Warning: We need though to be careful and not overdo it and suddenly have our governments pay negative interest rates on its debts; since then the citizens might begin to suspect not all smells right in the Kingdom.

World, beware of statist and communists dressed up as bank regulators

In July 1988 the Basel Accord (Basel I) approved that banks had to hold 8 percent in capital (equity) when lending to the private sector but that banks were allowed to lend to OECD’s central governments against no capital (equity) at all.

The introduction of such an amazing pro-government bias, I would even call it outright communism, distorted all common sense out of the allocation of bank credit to the real economy. 

And with Basel II, in June 2004, the Basel Committee made it even worse by allying themselves with the private AAArisktocracy, which of course left even more out in the cold, those we most need to have fair access to bank credit, our SMEs and entrepreneurs. 

And now with Basel III, the Basel Committee, with the blessing of the Financial Stability Board, and counting with the collegial silence of the IMF, is increasing regulatory complexity tenfold, and digging us even deeper into the hole.

PS. And, amazingly, Basel I happened while the attention was diverted discussing the supposed pro-private sector bias of the "Neo-Liberal" Washington Consensus.

PS. And even more amazingly... in its many hundred of pages... the Dodd-Frank Act does not even mention the Basel Accord of which US is a signatory or the Basel Committee

PS. Paul Mason just wrote "PostCapitalism". Since pure capitalism clearly ended with the Basel Accord, he must be referring to PostStateCapitalism.

En fråga till Herr Stefan Ingves av Sveriges Riksbank, som Ordförande i Baselkommittén

Just nu med Basel II och III, så kräver Baselkommittén att bankerna har mycket mer eget kapital gentemot tillgångar som uppfattas som riskabla, än gentemot tillgångar som uppfattas som säkra. 

Detta leder naturligtvis till att bankerna kan tjäna mycket högre riskjusterade avkastningar på sitt kapital vid utlåning till "de säkra", än vid utlåning till "de riskabla". Och detta naturligtvis snedvrider utgivandet av bankkrediter till den reala ekonomin… och gör att bankerna lånar ut för mycket, på för lätta villkor, till de säkra, liksom till de ofelbara sovereigns och till AAArisktokratin; och för lite, på relativt alltför hårda villkor, till "de riskabla", som till småföretag.

Så låt oss fråga Stefan Ingves om detta. Som ordförande för Baselkommittén borde han kunna gynna oss med en förklaring.

Herr Stefan Ingves. 

Ni måste vara medveten om att även då vissa enskilda banker kan råka i bekymmer på grund av alla möjliga olika anledningar, så är banksystemet som sådant, aldrig riktigt hotat av vad som är på förhand uppfattas som riskfyllt, men bara av vad som på förhands upplevs vara helt säkert… och som senare överraskar oss alla genom att inte vara det.

I detta avseende borde ju bankregleringens första mål vara att säkerställa att bankerna har tillräckligt med kapital, framförallt visavi det som uppfattas som helt säkert. Tyvärr är detta precis motsatsen till vad som krävs nu.

Och ni Herr Ingves måste också vara medveten om att för den långsiktiga stabiliteten av bankerna, finns det inget så viktigt som en robust ekonomi; och för att en robust ekonomi ska kunna existera, är det mer än viktigt att bankkrediter sprids ut till den reala ekonomin så effektivt som möjligt.

Och så i detta avseende bör bankregleringens andra mål vara att säkerställa att man inte stör och hindrar bankerna från att fördela bankkrediter så bra som möjligt ... så att t.ex. de som mest behöver tillgång till bankkrediter, som små företag och entreprenörer, kan få det. Tyvärr är detta också precis motsatsen till vad som händer nu.

Nå Herr Ingves… förklara för oss varför de nuvarande kapitalkraven på bankerna är inte så dumma som de ser ut.

Ps. "Ett fartyg i hamn är tryggt, men det är inte vad fartyg är till för." John Augustus Shedd, 1850-1926

Gud gör oss djärva!

Per Kurowski

Ekonom, Lund 1971. fd Executive Director World Bank (2002-2004)

PS: Prioritera finansiering av bostadsfastigheter över finansieringen av sysselsättningen är inte det smartaste man kan göra  

Mario Draghi, Stefan Ingves, Mark Carney, Jaime Caruana and other bank regulators, you should be ashamed

Thanks to theirs and other regulators’ credit risk weighted capital requirement for banks, the risks your banks now take, are that of dangerously excessive exposures to what’s deemed as “absolutely safe”; not the true risk-taking the economy needs; and, as a consequence, Europe, which was constructed upon true risk-taking, is now stalling and falling… and its youth condemned to be a lost generation.

You young Europeans, if you want to have a chance of a better world, or a least of a not too much worse world, then go tell your regulators to immediately stop basing their capital requirements for banks on some purposeless credit risk ratings, those which are already considered by banks; and to use instead creation-of-jobs-to-young-people ratings, sustainability of planet earth ratings, and, when lending to sovereigns, ethics and good governance ratings.

Tell them that they should know that secular stagnation, deflation, mediocre economy and all similar obnoxious creatures, are direct descendants of excessive risk aversion

PS. ​Of course the risk would then be that the rating of ethics and good governance falls into the wrong hands​.