Knowingly or unwittingly, I believe and pray for the latter, current bank regulators are saboteurs of the economy

There has never ever been an economy that has grown strong and sturdy based on risk-aversion… they have always done so based sometimes on pure unabridged crazy risk-taking and other times with reasoned audacity… but that is what have kept them moving forward without stalling and falling.

Therefore when regulators imposed credit-risk weighted capital (equity) requirements for banks; which allow banks to earn much much higher risk adjusted returns on equity on what is ex ante officially perceived as absolutely safe, like “infallible sovereigns”, housing sector and members of the AAAristocracy, than on what is perceived as “risky”, like the medium and small businesses, entrepreneurs and start-ups… then they, de facto, sabotaged the economy.

So who wants to be known in the history as one of the saboteurs who brought down our economies?

For your information, secular stagnation, deflation, mediocre economy and other similar creatures out there, are direct descendants of risk aversion.

Bank regulators hate me when I ask this simple question. They refuse to answer it. They can’t! That’s the real problem!

The Question: Sir, current risk weighted capital requirements for banks are based on the perceptions of risk by credit rating agencies and bankers. But if bankers and credit rating agencies perceive the risks correctly there should be no major problems. So why are not the capital requirements for banks based instead on the credit risks not being correctly perceived by bankers and credit agencies?

As is, the perceived risks are now, besides being cleared for in the interest rate charged by the banks and in the amount of exposure accepted,also cleared, for a second time, in the required bank capital (equity). And that has created the distortions that make the banks lend dangerously much to what is perceived as “absolutely safe”, and dangerously little to what is perceived as “risky”, like to medium and small businesses, entrepreneurs and start ups.

As is, the risk with risk weighted capital requirements for banks is much greater than the risks which are being weighted! Got it?

I suspect the whole mess results from the fact that when regulators were given an explanation similar to that which appears in “The Basel Committee on Banking Supervision´sExplanatory Note on the Basel II IRB Risk Weight Functions of July 2005”… they did not understand one iota of it, but did not want to admit that in front of their equally befuddled colleagues. In other words, could it be the weak egos of expert bank regulators which provoked this financial crisis?

A subsequent problem is of course that too few are capable of daring to think that globally renowned experts can be so utterly wrong… and so they do not dare to help me to ask The Question.

Friends, we have to put a stop to the lack of accountability of those working in Committees which decisions have global implications. Can you imagine what could happen to the earth if similar weak egos are placed in charge of a Global Warming Supervision Committee in Basel?

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

You bank regulators... get your priorities right, urgently, or we depict you on some shame poles.

Very few of us like having banks "too big to fail" or bankers receiving exaggerated bonuses. 

But, if banks are “too big to fail” and bonuses to bankers seem immorally large, but our banks still do a good job allocating economic resources efficiently, that is hard, but still quite livable. 

But if banks do not allocate economic resources efficiently, then even if all our banks are small, and easy to liquidate, and all our bankers do not receive more compensation than anyone else, that is still, something completely unacceptable. 

So please, European Parliament, European Commission, Basel Committee, Financial Stability Board, Michel Barnier, Stefan Ingves, Mario Draghi, Mark Carney, Lord Turner, Ben Bernanke… get your priorities right! 

The way YOU allow banks to hold lower capital against exposures considered as risky, than for exposures considered as safe, and which allows banks to earn higher expected risk-adjusted returns on what is perceived as safe than on what is perceived as risky, is bloody murdering the economies of the Western World, those economies which became prosperous thanks to a lot of risk-taking. 

When I think of all those opportunities missed, forever, to generate good jobs for our youth, only because of your regulations, I tell you I would have no qualms whatsoever depicting you on some shame poles, and placing these totems all around the most public places in Europe and America.

Mark Twain, the bankers, and the nannies of the Basel Committee. What a sad tale.

I guess you have all read Mark Twain’s description of bankers as those who lend you the umbrella when the sun shines and want it back when it rains. And that most definitely rang true for someone as me trying to get banks to cooperate giving credit to my small and medium sized businesses and entrepreneur clients. 

But then along came the nannies of an outfit known as the Basel Committee, and their advisor the Financial Stability Board and said that that banker mode was still way too risky for them. And the nannies and, told the bankers that if they lent to those the sun was shining upon, the absolutely not risky, then they only needed 1.6 percent or less in capital, which meant they could leverage their equity 62.5 to 1 or even more in some cases, but if they dared lend to the “risky” who it seemed could be rained upon, then they needed 8 percent in capital and could only leverage 12.5 to 1. 

And, we all saw what happened. Here we are now with our banks up to their necks in dangerous excessive, really obese, exposures to what was erroneously perceived as “absolutely not-risky”, and anorexic exposure to those officially perceived as “risky”, like the small businesses and entrepreneurs, precisely those our young most count on generating the next generation of good jobs for them. 

Is it not a sad tale? Especially for a Western World that has become what it is thanks to risk-taking? Especially for an America that feels proud being known as the “land of the brave”? I wonder what Mark Twain would have to say about those nannies and the parents who entrust them with their banks?

Why is Ben Bernanke (and his bank regulating colleagues) so inconsistent?

Ben Bernanke, the Chairman of the Fed, in a recent speech at Jackson Hole, refers to the possible costs the “the possibility that the Federal Reserve could incur financial losses should interest rates rise to an unexpected extent”, as a result of its balance sheet policies. 

Bernanke diminishes that very real possibility by arguing: to the extent that monetary policy helps strengthen the economy and raise incomes, the benefits for the U.S. fiscal position would be substantial. In any case, this purely fiscal perspective is too narrow: Because Americans are workers and consumers as well as taxpayers, monetary policy can achieve the most for the country by focusing generally on improving economic performance rather than narrowly on possible gains or losses on the Federal Reserve's balance sheet. 

And I must then ask why on earth Bernanke is unable to apply that same reasoning to our banks? Is not the purpose of the banks also that of helping to improve the performance of the economy? 

The sad fact is that our banks are currently constrained, by means of capital requirements based on perceived risk, from lending to the small business and entrepreneurs, those that mean so much to the real economy, only because regulators like Bernanke, worried sick, have foolishly decided these borrowers are too risky for the banks, when compared to lending to the absolute safe, like the AAA rated and the infallible sovereigns. 

The consequence of that is that if a bank lends to a Solyndra, it is required to hold more capital that if it lends to the government, so that a government bureaucrat can lend to a Solyndra. Frankly, a mind, if prone to believing in conspiracy theories, could not be blamed too much for suspecting that communism was being brought in, through the backdoor, by bank regulations. 

But setting aside any thoughts about foul play, what this regulations will create, and indeed have already created, are obese bank exposures to what is officially perceived as absolutely safe and anorexic exposures to the so needed and important “risky”. 

Bernanke ends by stating “The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.” 

Mr. Bernanke, let me then inform you that, in my humble opinion, because of your bank regulations, you and your colleagues are very much responsible for very much of that unemployment. Have you never thought of capital requirements for banks based on potential of job creation ratings?

Conclusion: The Milton Friedman helicopter approach, of dropping money from the sky, would be a much wiser approach for Ben Bernanke and the Fed to use than their QE’s, since that way some funds at least could reach the “risky”, like the small businesses and entrepreneurs, and not all get stuck with the officially perceived “absolutely safe”

Regulators, consider yourselves officially challenged to debate the wisdom of your bank regulations

I hold that current bank regulations, most especially capital requirements based on perceived risk, are utterly absurd, and dangerous, and that regulators have behaved irresponsibly when imposing these; and should be held accountable for participating directly, though certainly unwittingly, in causing the current economic difficulties... which are threatening to take the Western world down. 

I have argued the above in hundreds of conferences and thousands of blog comments, emails and articles, soon for a whole decade, and I have never ever received the hint of any type of counterargument from any regulator. 

Therefore I challenge all regulators, most especially the hot-shots like Mario Draghi, Lord Turner, Michel Barnier, Timothy Geithner, Mervyn King, Ben Bernanke, or of course whoever they want to designate to champion their cause, to publicly debate the issue with me, in depth.

Regulators, please stop waging war on the "risky"... they have it hard enough as is!

Per Kurowski 

A former Executive Director at the World Bank (2002-2004) 

Currently also censored by the Financial Times 

perkurowski@gmail.com

PS. Do you really want me to lower myself so much as to name you “The sissy bunch”, in order to get your attention? Well, if you absolutely want me to, if I absolutely have to... I guess I must and will.

PS. If you do not know what it is to wake up in the middle of the night, sweating, thinking, “what is it that I have missed” you have no clue about how it feels to question, so fundamentally as I do You… The Regulatory Establishment.

PS. Do I have the necessary qualifications to participate in the debate? You bet! Just read some of my earliest comments and warnings on this issue. Few if any has been so clear so early on what was expecting us.

PS. A similar challenge, more than a year ago!

PLEASE!, all those of you who feel regulators should dare to debate their regulations, do whatever you can do to support this challenge… tweeting re-tweeting or even calling your congressman!