Why are excessive bank exposures to what’s perceived safe considered as excessive risk-taking when disaster strikes?

In terms of risk perceptions there are four basic possible outcomes:

1. What was perceived as safe and that turned out safe.

2. What was perceived as safe but that turned out risky. 

3. What was perceived as risky and that turned out risky.

4. What was perceived as risky but that turned out safe.

Of these outcomes only number 2 is truly dangerous for the bank systems, as it is only with assets perceived as safe that banks in general build up those large exposures that could spell disaster if they turn out to be risky.

So any sensible bank regulator should care more about what the banks ex ante perceive as safe than with what they perceive as risky.

That they did not! With their risk weighted capital requirements, more perceived risk more capital – less risk less capital, the regulators guaranteed that when crisis broke out bank would be standing there especially naked in terms of capital. 

One problem is that when exposures to something considered as safe turn out risky, which indicates a mistake has been made, too many have incentives to erase from everyones memory that fact of it having been perceived as safe.

Just look at the last 2007/08 crisis. Even though it was 100% the result of excessive exposures to something perceived as very safe (AAA rated MBS), or to something decreed by regulators as very safe (sovereigns, Greece) 99.99% of all explanations for that crisis put it down to excessive risk-taking.

For Europe that miss-definition of the origin of the crisis, impedes it to find the way out of it. That only opens up ample room for northern and southern Europe to blame each other instead.

The truth is that Europe could disintegrate because of bank regulators doing all they can to avoid being blamed for their mistakes.

Here is the succinct but complete explanation of the subprime crisis. One, which apparently should not be told.

Here's a prologue, on the 10th anniversary of the Lehman Brothers collapse: In 2006 in a letter to the Financial Times I argued for the long-term benefits of a hard landing. The Fed and ECB decided to kick the can forward and upwards, which could have worked; better at least, had they removed the distortions that created the crisis. 

Just four factors explains it all, or at least 99.99%.

Securitization: The profits for those involved in securitization are a function of the betterment in risk perceptions and the duration of the underlying debts being securitized. The worse we put in the sausage – and the better it looks - the more money for us. Packaging a $300.000, 11%, 30 year mortgage, and selling it off for US$ 510.000 yielding 6% produces and immediate profit of $210.000 for those involved in the process. (Those who are being securitized do not participate in the profits)

Credit ratings: Too much power to measure risks was concentrated in the hands of some very few human fallible credit rating agencies.

Borrowers: As always there were many financially uneducated borrowers with needs and big dreams that were easy prey for strongly motivated salesmen, of the sort that can sell a lousy time-share to a very sophisticated banker. 

Capital requirements for banks. Basel II, June 2004, brought down the risk weight for residential mortgages from 50% to 35%. Additionally, it set a risk weight of only 20% for whatever was rated AAA to AA. The latter, given a basic 8%, translated into an effective 1.6% capital requirement, which meant bank equity could be leveraged 62.5 times to 1.

Clearly the temptations became too much to resist for all involved.

The banks, like the Europeans, thinking that if they could make a 1% net margin they could obtain returns on equity of over 60% per year, went nuts demanding more and more of these securities; and the mortgage producers and packagers were more than happy to oblige, signing up lousier and lousier mortgages and increasing the pressure on credit rating agencies. The US investment banks, like Lehman Brothers, also participated, courtesy of the SEC.

Of course it had to end bad... and it did!

Can you image what would have happened if the craze had gone on one or two years more?

I have explained all the above in many shapes or form, for much more than a decade. Unfortunately it is an explanation that is not allowed to move forward, because it would put some serious question marks about the sanity of some of the big bank regulators.

Might I need to go on a hunger strike to get some answers from the Basel Committee and the Financial Stability Board?

PS. Here is a somewhat more extensive aide memoire on the mistakes in the risk weighted capital requirements for banks.

PS. And here are some of my early opinions on these regulations, some of them while being an Executive Director at the World Bank, 2002-04

PS. Here’s my recent, 2019, comments sent to the Financial Stability Board

PS. Here’s my recent, 2019, letter sent to the IMF

PS. And here is a very humble home-made youtube comment on it all, from 2010

If the US stops distorting the allocation of bank credit to the real economy… does Europe dare to be left behind?

For 6.000 (out of 6.400) traditional US banks those that hold, effectively, zero trading assets or liabilities; no derivative positions other than interest rate swaps and foreign exchange derivatives; and whose total notional value of all their derivatives exposures - including cleared and non-cleared derivatives - is less than $3 billion...

Thomas M. Hoenig, the Vice Chairman of the FDIC is proposing the following:

“A bank should have a ratio of GAAP equity-to-assets of at least 10 percent. The substantial majority of [US] community banks already have equity-to-asset ratios of 10 percent or higher, and the number is in reach for those that do not.”

“Exempting traditional banks from all Basel capital standards and associated capital amount calculations and risk-weighted asset calculations.”

If approved, that would effectively mean the US begins to distance itself from the pillar of Basel Committees bank regulations, the credit-risk-weighted capital requirements.

Since those capital requirements odiously discriminate against the fair access to bank credit of borrowers deemed “risky”; and thereby distorts bank credit allocation, that would mean that most US banks would be able to return to real lending to the real economy.

Does Europe dare to be left behind in such development?

PS. Its about time the US suspended such regulatory discrimination, which should never have been allowed, according to the Equal Credit Opportunity Act (Regulation B)

With their regulatory repression of banks, the Basel Committee and the Financial Stability Board are slaying our economies.

“Banks if you lend to a risky small business or an entrepreneur (broccoli) we will force you to hold more equity (spinach) but, if you lend to our dear safe mother government (ice-cream), we will reward you by allowing you to hold much less equity (chocolate-cake).”

The economies of Europe, of the whole Western world, are unwittingly being submitted to euthanasia by bank regulators too dumb (hopefully) to understand what they are doing.

Our economies, dieting solely on carbs, are being immobilized by growing obesity (as evidenced for instance by  negative interest rates) and any of these days they will suffer a heart-attack.

ECB, IMF: Unbelievable, Greece’s “Memorandum on Economic & Financial Policies” does not include what Greece most needs

For more than a decade and still at this particular moment any European bank, including Greek banks, has been required to hold much more equity when lending to any Greek small business or entrepreneur, than when lending to any European sovereign or European corporation that possesses a good credit rating. 

And therefore European and Greek banks, scarce of equity, are not lending sufficiently to Greek small businesses or entrepreneurs… nor for that matter to other European small businesses or entrepreneurs.

And anyone who believes Greece (and Europe) can be pulled out of its current problems, by not giving fair access to its small businesses or entrepreneurs, has no idea of what goes on in the real economy. 

If there is something Greece (and Europe) needs, urgently, is to get rid of those odiously discriminating risk adverse equity requirements, those which have banks not financing the risky future any longer, but trampling stale water, only refinancing the supposedly safer past.

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

God make us daring!

PS. In relation to this you might be interested in: “Who did Europe in!”

PS. Here is a more complete explanation of what is wrong.

PS. Here is an alternative action plan for the ECB.

ECB, swap the European sovereign bonds you acquired with QEs, for fresh bank equity in European private banks.

My heart goes out to the so many who are unemployed in Europe, as a direct consequence of banks not lending to SMEs and entrepreneurs, this a direct consequence of being required to hold much more of very scarce bank equity when doing so, than when lending to the “infallible sovereigns” or to the AAArisktocracy.

My heart goes out to pension funds, widows and orphans, who do not find a “safe” place for their investment and savings because, as a direct consequence of those same bank equity requirements, they must now compete with banks eager to access debt issued by the “infallible sovereigns” or by the AAArisktocracy.

And growth in Europe is so dismal that even those classified as “infallible sovereigns”, are offering negative rates, which of course is a “haircut”.

I have no idea whether it would be politically viable but, if I was the ECB, and or a government in Europe, the following is the proposal I would put on the table for its urgent discussion:

Assign the same 100% risk weight to all bank assets, so as to allow banks to allocate credit efficiently to the European real economies. 

That would signify an 8 percent equity requirement for all bank assets, which would open up a very significant need for new bank equity.

Let the ECB temporarily fill that hole by subscribing bank equity, paying with the sovereign bonds it has acquired as a consequence of QEs.

In due time ECB would resell those bank shares to the markets. While these shares are in possession of ECB, it will refrain from exercising any voting rights.

Banks can do whatever they want with those bonds… but since holding sovereign bonds would now require them to have 8 percent in equity we can safely assume they would resell these as well as other sovereign bonds they had, to pension funds and widows and orphans.

Banks would as a consequence immediately be able to look again at credit request from the tough "risky" risk takers Europe needs in order to have a future. Enough with not financing the future and just refinancing history J

Bankers, having then to service the dividend aspirations of much more equity, could of course see their bonuses slightly constrained J

And I guess that adequately capitalizing banks, is of some interest not only of those sovereigns in the periphery J

What would happen to current market value of bank shares? We do not know, but perhaps their dramatically increased safety would more than compensate for their much lower allowed leverage, and prices could even go up. Who knows, perhaps even pension funds, widows and orphans could become buyers of European bank shares J

Western world... listen!

God make us daring!

Or do like Chile did!

How much are European taxpayers paying in reduced taxable income?

There is a photo that I cannot let go; that of four European leaders, sitting in a row boat, in a small lake, close to shore, surely surrounded by dozens of security officers and photographers… and they all carry life vests. The only objective reason I can think of for taking that security precaution, is that they might suspect that one of them harbors suicidal instincts and wants to take one of the others down with him… and, if so, perhaps life vests should be prohibited, so as to allow the good-riddance to operate.

And I react the same way when over and over again I hear about how important it is that tax payers should not have to pay for bank failures, without any consideration to whether those bank failures have helped to produce enormous taxable incomes or not.

A damn nannie mentality has taken over bank regulations and is destroying Europe (and others)… it does not even reflect the risk aversion of an average nannie but the risk aversion you get when adding up the risk aversion of two nannies. Absolutely insane!

As a result banks in Europe are now allowed to make much higher risk-adjusted returns on equity for exposures considered as safe from a credit perspective than on exposures considered as risky. And that completely ignores the fact that it is primarily the access to bank credit of the risky borrowers, the small businesses and the entrepreneurs, which will decide the sturdiness of tomorrow’s economy.

If I was a finance minister of any European country I would in fact want to allow the banks to leverage their equity the most, precisely when lending to small business and entrepreneurs… and not like now when they are allowed to do that lending to infallible sovereigns, to members of the AAAristocracy and to the housing sector.

How much less taxable income, how much less availability of jobs results from the regulatory risk aversion in banking is anyone’s guess… but I assure a lot more than any taxes that would temporarily be saved by forbidding banks to take those risks that bankers are anyhow also adverse to take.

The Per Kurowski rule: The safer a bank asset is perceived, the worse its negative impact if it turns out to be risky.

If credit risks are correctly perceived by banks, one or another bank could still run into problems, but there will be no major bank system crises. It is when credit risks are incorrectly perceived that things with our bank system can get really bad.

So what the Basel Committee for Banking Supervision has done, which is creating credit risk weighted capital requirements for banks, based on as if the perceived risks are correct, makes absolutely no sense. If anything those capital requirements should have been based on the possibilities of those credit risks being more risky than what they are perceived to be. 

But the impact of all credit risk perceptions being wrong, is not the same over the whole spectrum of risks. In fact bank regulators ignored what I quite presumptuously have decided to dub the Per Kurowski rule; namely that the more the credit risk perception is one of safeness, the larger the negative impact on a bank if that perception turns out to be wrong.

That rule should be easy to understand when one realizes that it is for what is considered as very safe, that a bank most runs the risk of running up too high exposures, in too lenient terms, and charging too little compensating risk premiums.

The impact on banks of what is considered as risky, if it turns out to be more risky, is ameliorated by the fact that it usually represents smaller exposures, and usually belongs to a group of exposures  which are mutually covered through much larger risk premiums.

Since different capital requirements allows some assets to produce higher risk-adjusted returns than others, and that distorts the allocation of bank credit to the real economy, I favor one single percentage capital requirement for all bank assets.

But, if regulators absolutely feel they must meddle, in order to show they earn their salaries and their societal recognitions, then they should at least abandon the current capital requirements based on credit risk weighting, in favor of an impact weighting of credit risks being wrongly perceived.

What would this mean in practice? That our banks would again be allowed to lend to the risky but tough small businesses and entrepreneurs we all need to get going when the going gets tough.

In other words… just what a doctor would order, for example for Europe… and so that banks can help to produce the next generation of jobs for the next generations of Europeans.

Intuitive decision: Perceived safe is safe, perceived risky is risky.

Deliberate decision: Perceived safe is risky, perceived risky is safe.

PS. Per Kurowski's second rule: Any perfectly perceived credit risk, causes wrong credit decision, if the perceived risk of credit is excessively considered.

Europe, a future built by avoiding risks, is as risky as futures come.

Europe, your bank regulators allow, your banks, to earn much higher risk adjusted returns on equity with assets perceived as absolutely safe than with assets perceived as risky.

And that means that an enormous amount of small businesses and entrepreneurs, only account of being perceived as more risky credit risks, are being denied fair access to bank credit.

And with that the European youth is being denied the job creation their parents got.

Risk-aversion is not a good building block for a better future. Any current risk aversion just eats into the prosperity achieved by old risk-taking… until there is no prosperity left.

Europe, you can’t pick and choose. What’s safe today was most probably very risky yesterday. Risks and safety are part of the same world.

Europe, your pusillanimous nannying bank regulators are too dangerous… and you better wake up to that fact before its too late.

Your bank regulators are giving banks the incentives to keep away from financing the risky future and  to stay making their profits by just refinancing the safer past.

Europe, I do not think your bank regulators are doing this to you on purpose. Otherwise they should be hauled in front of courts for committing crimes against humanity.

God make us daring! Free us from imprudent risk-aversion!

Pope Francis, please go and explain “The Parable of Talents” to the members of the Basel Committee

At the European Parliament, Pope Francis spoke of a need to reinvigorate Europe, describing the continent as a "grandmother, no longer fertile and vibrant" and saying it risked "slowly losing its own soul".

"The great ideas which once inspired Europe seem to have lost their attraction, only to be replaced by the bureaucratic technicalities of its institutions," he said.

Indeed, but what else can you expect when bank regulators bureaucrats instruct banks not to lend to what seems "risky", that which most often includes the new and the future. And that they do by allowing banks to leverage immensely their equity, as long as they keep to what’s seems absolutely safe, that which most often includes the old and the history.

Had these regulations been in place earlier, Europe would not have become “a beacon of civilization” as Pope Francis believes it still is. Now it is with sadness we see regulators turning out its lights.

Next time Pope Francis would do better going to the Basel in order to explain The Parable of Talents to the members of the Basel Committee, those who have now castrated the European banks.

Lights are being turned out in Europe

PS. And Pope Francis could also remind regulators of Pope John Paul II saying: 

Our hearts ring out with the words of Jesus when one day, after speaking to the crowds from Simon's boat, he invited the Apostle to "put out into the deep" for a catch: "Duc in altum" (Lk 5:4). Peter and his first companions trusted Christ's words, and cast the nets. "When they had done this, they caught a great number of fish" (Lk 5:6).

God make us daring!

PS. Here my letter to the Financial Stability Board

Bye bye Europe! Having introduced financial feudalism, Europe has gone back to the Middle Ages.

The AAAristocracy, those who posses or have access to an AAA rating; and the sovereigns, those who have declared themselves to be infallible have, with the witting or unwittingly cooperation of neo-vassal bank regulators, managed to introduce a system that guarantees them, more than ever, preferential access to bank credit.

That has been achieved by means of the portfolio invariant credit risk based capital, meaning equity, requirements for banks. More perceived credit risk - more equity; less risk - less equity. Because that insidious piece of regulation allow banks to earn more risk-adjusted returns on equity when lending to the AAAristocracy or when lending to the “infallible sovereign”, than when lending to the “risky”, like to small businesses and entrepreneurs.

And, as anyone should be able to understand, the more you subsidize the access to bank credit for some, in this case through regulations, the harder it is for those excluded to compete for it.

In short, a sort of financial feudalism has taken over Europe. 

And since that impedes fair access to bank credit, the land, to those Europe most needs to have it, its peasants, there is but one way it can go... and that is down down down.

And clearly this odious discrimination against the opportunities of the peasants, can only increase the inequalities in the society. 

But of course it will all come to an end, when the banks fail because of lending too much at too low rates, to a not so infallible sovereigns or to a false AAAristocrat... since that is why banks have always failed. Never ever have they failed by lending too much to peasants.

PS. It is not only Europe that is affected. The Basel Committee is spreading financial feudalism around the world... now even in America, "the land of the free", they have AAAristocrats... more precise yet AAArisktocrats

The tragic and not understood reality of a Mario Draghi ECB/SSM speech

Ladies and Gentlemen,

I am very pleased to welcome you to the inauguration of the Single Supervisory Mechanism.

The current “crisis has caused many of our fellow citizens to question whether the European project can keep its promise of shared economic prosperity.”

In particular, we needed to decisively and credibly address the weaknesses in the banking sector. That is: “key to protecting citizens and businesses as taxpayers, depositors and borrowers.

And so I am happy to announce that ECB and our dear colleagues in the Basel Committee and the Financial Stability Board, have decided to continue imposing on banks capital, which means equity, requirements based on perceived risk.

More ex ante perceived risk-more equity; less ex ante perceived risk-less equity. 

And that means that our banks will keep on earning higher rates of return on equity when lending to for instance our infallible sovereigns and to members of the AAAristocracy, than when lending to risky medium and small businesses, entrepreneurs and start-ups.

And, as you can understand, banks will keep on acting according to those incentives… they’ve got no choice.

What do you think about that?

Yes I hear you… it did not work that well in Basel II… and insufficient job creation persist. Yes indeed, but you all know we are the experts and we know we can’t be wrong, and so we must insist, until we prevail.

Good night… and do not forget to turn out the lights!

Après nous le deluge

Why Europe should be scared having the ECB, under Mario Draghi, being the supervisor of its 120 most significant banks.

Why?

Because Mario Draghi, as the former chairman of the Financial Stability Board either likes it, or has not understood that: 

If you allow banks to have much lower capital (equity) when holding, from a credit risk point of view only, "absolutely safe" assets than when holding "risky" assets; then you allow banks to earn much higher risk adjusted returns on equity on assets perceived as “absolutely safe” than on assets perceived as “risky”… and then banks will lend too much at too low interests to those perceived as “absolutely safe”, and too little at too high interests to those perceived as “risky”, namely the medium and small businesses, the entrepreneurs and start-ups…namely, as they say, those tough risky risk-takers Europe most needs to get going when the going gets tough.

And, for more clarity, because Mario Draghi is not capable to understand that secular stagnation, deflation, mediocre economy and all similar obnoxious creatures, are direct descendants of silly risk aversion.

And, for more clarity, because Mario Draghi does not understand that Europe was built up with risk-taking and that, without it, it will fall and stall.

Just look now at the ECB doing all its expensive “Comprehensive Assessment of all significant banks in the euro area by the ECB”, and worrying exclusively about not finding anything risky on bank’s balance sheets, and not one iota about all those loans that should be there, had it not been for this sissy and odious discrimination against what is ex ante perceived as risky. 

As you see Europe, Mario Draghi is really dangerous for your future. And especially so if you are young and about to run the risk of belonging to a lost generation.

Now if you are a European just concerned with making it a couples of months, or perhaps some few years more down the line, because you subscribe to the philosophy of “après nous le deluge”, then keep Mario Draghi, because then he really is your man.

PS. Europe, keep an eye open on Stefan Ingves, the chair of the Basel Committee, and on Mark Carney, the current chair of the Financial Stability Board... they are just as dangerous.

@ECB Mario Draghi: Europe urgently needs to stop the discrimination in favor of “the safe” and against “the risky”.

Europe, much more than quantitative easing, “targeted long-term refinancing operations” or lower rates would need Mario Draghi to declare 

“From now on we the ECB will not admit bank regulators treating lending to medium and small businesses, entrepreneurs and start-ups, as intrinsically more risky for Europe, than lending to the “infallible sovereigns”, the housing sector and the AAAristocracy”

That refers to the need of stopping the distortion that risk-weighted capital requirement produce in the allocation of credit in the real economy ,something which is the number one reason for having caused the crisis (AAA rated securities Greece), and the number one reason for which the young unemployed Europeans might be doomed to become a lost generation.

Would that endanger the banks? Of course not! Who has ever heard about a bank crisis caused by excessive exposures to what was ex ante considered risky, these have always resulted from excessive exposures to what was ex ante considered “absolutely safe” but that ex post turned out not to be.

Young unemployed Europeans, you cannot afford having Mario Draghi, Mark Carney and Stefan Ingves hanging around.

Mario Draghi is the former chairman of the Financial Stability Board (FSB) and the current President of the European Central Bank, ECB.

Mark Carney is the current governor of the Bank of England and the current Chairman of the Financial Stability Board.

Stefan Ingves is the current Governor of Sveriges Riksbank, the Swedish Central Bank, and the Chairman of the Basel Committee for Banking Supervision.

These three gentlemen all believe that what is really risky is what is perceived ex ante as risky, which is something like believing the sun revolves around the earth... because any correct reading of financial history would make it clear that what is really risky ex post, is what is ex ante perceived as absolutely safe.

And that is why they have approved of risk weighted capital requirements for banks which allow banks to have much much less capital when lending to “The infallible”, like to sovereigns, the AAAristocracy or the housing sector, than when lending to “The Risky”, like to medium and small businesses, to entrepreneurs and start ups.

And that is why banks can earn much much higher risk adjusted returns when lending to “The Infallible” than when lending to “The Risky”.

And that is why banks cannot allocate bank credit efficiently to the real economy.

And that is why so many young Europeans are out of jobs and without real prospects of being able to land themselves some decent jobs, in their lifetime.

And that is why you must, urgently, let the Copernicus', the Galileo's, and the Kepler’s of financial regulations in.

Those who before they start avoiding risks might have asked themselves: "What risk is it that we can the least risk our banks not to take?"; and have answered that with…“the risk that banks do not lend to the risky medium and small businesses, to entrepreneurs and start ups... those who most need bank credit... those who are best positioned to find the luck we need to move forward”

Young of Europe... if you do not rock this regulatory boat you're lost! 

Holy moly! I always suspected bank regulators regulated from an ideological position, but I had never heard such a confession.

I arrived to Washington in November 2002 to take up a two year position, until October 2004, as one of 24 Executive Directors at the World Bank.

I was then already warning about the distortions that capital requirements for banks based on perceived risks would cause in the allocation of credit to the real economy… and already predicting that it all had to end with a big AAA-Bang.

As an example in November 2004, in a letter published by the Financial Times I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? 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."

That because already in 1988 with Basel I the Basel Accord regulators gamed the equity requirements for banks in favor of the sovereigns, meaning the governments, meaning their bosses. This they did by allowing banks to hold much less equity against loans to the infallible sovereigns than against loans to the risky citizens.

But over the years in hundred of conferences, I never got anyone reasonably high up to explain the why they did it… that is, until May 1 2014, at Brookings Institute, during a presentation of Jean Pisani-Ferry’s book “The Euro crisis and its aftermath”, Jörg Decressin, a deputy director in the IMF’s European Department, a former deputy director of IMF's Research Department gave me a very straightforward answer… bless him. 

I could not believe what I heard… and neither will you.

My question: (audio 58.30-59.30)

"I am Per Kurowski, a Polish citizen, A European, at least since last Monday, since I suffered a little intermezzo due to a minor problem with the translation of my birth certificate (from Venezuela).

In Sweden we heard in churches psalms that prayed for “God make us daring!” And risk-taking is definitive something that has made and created Europe.

But in June 2002 the Basel Committee introduced capital requirements which really subsidized risk aversion, and taxed risk-taking. For instance a German bank when lending to a German business man need to hold 8 percent in capital but if they lent to Greece they needed zero. 

And those capital requirements distorted the allocation of bank credit in the whole Europe. That is not mentioned in the book. Would you care to comment?"

Decressin’s answer: (audio 1.03.50 – 1.05.37) 

"The capital requirements taxing entrepreneurs… 8% on entrepreneurs, 0% on governments

You raise a very good question and an answer to this revolves around: 

Do you believe that governments have a stabilizing function in the economy? Do you believe that government is fundamentally something good to have around?

If that is what you believe then it does not make sense necessarily to ask for capital requirements on purchases of government debt, because you believe that the government in the end has to have the ability to act as a stabilizer, when the private sector is taking flight from risk, that is when the government has to be able to step in and the last thing we want is then for people also to dump government debt and basically I do not know what they would do, basically buy gold. 

If on the other hand your view is that the government is the problem then you would want a capital requirement, so it depends on where you stand 

I think the issue of the governments being the problem was very much a story of the 1970s and to some extent the 1980s. The problems we are dealing with now are more problems in the private sector, we are dealing with excesses in private lending and borrowing and it proves very hard for us to get a handle on this. We have hopes for macro prudential instruments but they are untested, and only the future will show how we deal with them when new credit booms evolve.”

Jean Pisani-Ferry… agreed and left it at that. 

Holy Moly! I always suspected it, but I never believed I would be able to extract a confession from regulators that they really are regulating from an ideological position!!!

And sadly I had no chance to ask back: Are you Mr. Decressin arguing that we must help government borrowings ex ante, so that government can better help us ex post? As I see it then, when we might really need the government, it will not be able to help us out because by then it would itself already have too much debt… like Greece.

In short, the structural reform most needed to make Europe grow, is to throw out the bank regulators and their risk aversion, and their pro-government and anti-citizens ideology!

The audio: http://www.brookings.edu/events/2014/05/01-european-crisis-aftermath#

Who authorized the regulators to apply their ideology when regulating banks?

How does this square with the frequent accusations of IMF representing the extreme neo-liberalism?

Am I new to the problems of the euro and the eurozone? Judge yourself!

PS. Jean Pisany-Ferry's completely ignored this problem in his book. The approval in June of 2004 of Basel II, is not even listed among the 119 dates and events presented in the “Euro crisis timeline”. A timeline which begins in February 1992 with the signing of the Maastricht Treaty and ends on December 18, 2014, with the European Council reaching an agreement on the Single Resolution Mechanism.

You the young in Europe, you don’t find jobs? Thank your sissy bank regulators for that!

You the young in Europe, especially you the unemployed, listen up!

Your bank regulators set up a system by which they allowed the banks to earn much higher risk adjusted returns on equity for what was considered safe, like AAA rated securities, real estate in Spain and lending to Greece… something which the banks liked very much, and therefore they lent too much, like to AAA rated securities, real estate in Spain and Greece, and which you all know by now caused the mother of all disasters.

And as a result of the same system your banks earn much less risk adjusted return on equity when lending to the “risky” medium and small businesses, entrepreneurs and start-ups, and so the banks, naturally, do not lend to those who could perhaps most provide you with the next generation of decent jobs.

And so, if you occupy Basel, in order to protest the Basel Committee, let me assure you that you have my deepest sympathy, and my full understanding… Good luck! You need it, the baby-boomers have much power. 

Per Kurowski

The “too-big-too-fail” bank facilitators... or even promoters

The Basel Committee, with its Risk-weighting of Assets and Tier Capital mumbo jumbo, introduced horrendous confusion in the market.

One way to get a clearer picture of what banks are really up to, at least with respect to leverages, is to use that old trustworthy debt to equity ratio.

Using it on one of the European big bank´s balance sheets as of December 2012, I found that its Liabilities amounted to 1.96 T, I guess in Euros, and its Equity to 54.41bn. Well that would indicate a 36.02 Debt Equity Ratio.

Let me be clear… any bank regulator willing to allow for a higher than 12 to 1 Debt to Equity Ratio is most definitely a “too big to fail” bank facilitator, or even a promoter.

Europe’s unemployed youth, is a result of expulsing testosterone from its banking system. Is it accident or terrorism?

To call banks cuddling up excessively in loans to the Infallible Sovereign and the AAAristocracy, an excessive risk-taking which results from too high testosterone levels, is ludicrous. That is just cowardly hiding away, guided by computer models, in havens officially denominated as absolutely safe.

The risk-taking which requires true banking testosterone is the lending to medium and small businesses, entrepreneurs and start ups.

Unfortunately bank regulators, by means of allowing for far less capital when lending “to the safe than when lending to “the risky”, guaranteed that the expected risk-adjusted returns on bank equity when lending to the former were much much higher than when lending to the latter. 

And, as any economist knows, equity goes to where the highest returns are offered. And so bankers possessing true testosterone, were all made redundant. And since the safe jobs of tomorrow need the risk-taking of today, and “the risky” got and get no loans, the European youth ended up without jobs… or even the prospective of jobs.

I have always thought this regulatory calamity was an accident resulting from allowing some very few regulators to engage in intellectual incest, in some small mutual admiration club where it is prohibited by rules to call out any member as being at fault.

But now, since more than five years after the detonation of the bomb that was armed in 2004 with Basel II, the issue of the distortion these capital requirements produce in the allocation of bank credit in the real economy is not yet even discussed, reluctantly, because I am no conspirator theories freak, forces me to admit the possibility of terrorism.

And frankly what is the difference between injecting bankers with a testosterone killing virus, and doing so with a mumbo jumbo bank regulation no one really understands?

Poor European youth… they are not yet aware that unless they expulse the current bank regulators from the Basel Committee and the Financial Stability Board, for being dumb or terrorists, they live in an economy that is going down, down, down.

In Europe banks no longer finance the future

These just refinance the past... (and so Europe is going down, down, down)

Let me refer again to the tragically misguided banking regulations in the world, designed by some who do not care one iota for the real economy, that which are not the banks.

The main principle of such regulations are capital requirements (equity) based on perceived risks. More risk more capital, less risk less capital.

And that results in the bank can expect to earn much higher expected risk-adjusted returns on equity , when financing the safe (refinancing the past) than when finance the risky (the future).

And that results in that the economies do not take enough risks to produce its absolutely-safes of tomorrow ... but will dedicated itself to milk the cows of yesterday, to extract their last drop of milk.

And all sheer stupidity. Regulators ignored, and still ignore, that perceived risks, such as those reflected in credit ratings, have already been cleared for by banks and markets when setting interest rates, the amounts of the loans, duration and other clauses, And so when the same perceptions of risk, are reused, now to determine the required capital, this only ensures that the banking system overdoses on perceived risk.

They also forgot that their regulatory risk with banks has nothing to do with the perceived risks of the bank's customers ... and everything to do with how the bankers perceive and react to these perceptions.

And that the above causes distortions in the allocation of bank credit in the real economy, still nothing is discussed.

For an older person, retired, with barely sufficient savings, a financial advisor must recommend a super safe conservative investment strategy which provides liquidity, traditionally bonds. But, in the case of a young professional, who is saving for retirement in 30 years, the obligatory advice is to take much more risks, such as buying stocks.

And so you can say that bank regulators follow rules adequate for the old, and not for the young. I assure you that if the European youth, such as that in Spain, Italy, Portugal and Greece, lifted their eyes just a little while from their iPads, or similar devices, and realized what was being done to them, many sites would burn...like Troy.

Worse yet, the regulators require banks to have an 8% capital when lending to an ordinary citizen entrepreneur, but allow these to lend to their governments, holding no capital at all. This has quietly introduced a perverse communism, and disrupted all price-risk equations in capital markets. Of course, all in close association with other beneficiaries like the members of the AAAristocracy.

But, you might say ... "At least we will have safe banks". Do not delude yourself. All banking crisis, whenever not a case of outright fraud, have been unleashed by excessive lending to what ex ante was perceived as absolutely safe, and which, ex post, turned out to be risky, and no banking crisis in history, has resulted because of excessive loans to what was correctly perceived as risky.

As a young man, in Sweden, in the churches where from time to time I went, they sang psalms which implored, "God, make us daring". European regulators, with respect to their banks, are now rewarding cowardice... (and so Europe is going down, down, down)

Translated from El Universal