De riskvägda bankkapitalkraven borde åtminstone ha baserats på betingade sannolikheter. Det var de/är de inte.

Här några tweets om P (A / B)

I sannolikhetsteori är betingat sannolikhet sannolikheten för att en händelse (A) inträffar (som att banker lånar för mycket till någon säker), med tanke på att en annan händelse (B) har inträffat (att bankirerna hade uppfattat denne någon som mycket säker).

I sannolikhetsteori är betingat sannolikhet sannolikheten för att en händelse (A) inträffar (som att  banker lånar för mycket till någon riskabel), med tanke på att en annan händelse (B) har inträffat (att bankirerna hade uppfattat denne någon som mycket riskabel).

Ingen tillsynsmyndighet som vet något om betingad sannolikhet skulle aldrig ha tilldelat, med tanke på riskvägda bankkapitalkrav, en låg riskvikt på bara 20% till de bedömda som mycket säkra AAA, och en hög 150% till de bedömda som mycket riskabla lägre än BB-

PS. En fråga till Herr Stefan Yngves 2015

PS. Mitt brev till Financial Stability Board

FSB reports: “G20 reforms are building a safer, simpler, fairer financial system”. What a triple lie!

FSB reports to G20 Leaders on progress in financial regulatory reforms, and it starts with: G20 reforms are building a safer, simpler, fairer financial system

“Safer”? Major bank crises do not result from excessive exposures against what is perceived risky, but always from unexpected events or excessive exposures to what was ex ante perceived, decreed or concocted as safe, but that, ex post, turned out to be very risky.

In the FSB video they say “A safe banking system needs enough capital to absorb unexpected losses” and so my question is: So why require capital based on expected risks?

“Simpler”? Don’t be ridicule! Just have a look at the Basel Committee’s absurdly obscure “Minimum capital requirements for market risk” of January 2016, and on its consultative document for a "simplification" of July 2017.

The FSB video does not really even dare to explain the "simpler" factor.

“Fairer”? Forget it! The discrimination in the access to bank credit in favor of those perceived, decreed or concocted as safe, like the Sovereigns and the AAA-risktocracy is still alive and kicking; just like that one against “the risky”, the SMEs and entrepreneurs. It is an inequality driver.

No wonder the FSB video has the comments disabled.

G20 you want to understand what is wrong with current bank regulations? Start here!

Stefan Ingves, years after Basel Committee’s failure, you all have still no idea about how to regulate banks.

On December 2, 2016 Stefan Ingves, the Chairman of the Basel Committee gave a Keynote speech at the second Conference on Banking Development, Stability and Sustainability, titled “Finalising Basel III: Coherence, calibration and complexity” 

In it Ingves stated: “an area of further research which would be welcome relates to how we should think about the capital benefits of allowing banks to use internally modelled approaches, and therefore the appropriate calibration of capital floors to such models. What are the pre-conditions for such models to produce better outcomes than, say, simpler standardised approaches? And to whom do the benefits of improved modelling accrue? If a bank using a model can lower its capital requirements by, say, 30%, what are the financial stability and real economy benefits of such an approach? To what extent do the benefits of modelling accrue to lower-risk borrowers as opposed to the parties being compensated for developing and using the models?”

That is clear evidence that the Basel Committee still, soon ten years after the crisis, their failure, has no idea about what it is doing. It should concern us all. 

Here’s one example on of how the Basel Committee’s has totally confused ex ante risks with ex post risks. In their Basel II standardized risk weights the weight assigned to AAA assets is 20% while the weight of a highly speculative below BB- rated assets was set at 150%. 

I ask: What has much greater chance of taking the banking system down, excessive exposures to something ex ante believed very safe or excessive exposures to something believed very risky? The answer should be clear. Never ever have bank crises resulted from excessive exposures to something believe risky when placed on the balance sheet; these have always resulted from unexpected events (like devaluations), criminal behavior or excessive exposures to something perceived ex ante as very safe but that ex post turned out to be very risky. 

The truth is that the Basel Committee told banks: “Go out and leverage your capital more than with assets that are safe”. And so when disaster happens, like with AAA rated securities, banks stand there more naked than ever.

Of course, the other side of that coin is, “Do not go and lend to what is risky”. So banks dangerously for the real economy stopped lending to SMEs and entrepreneurs… something that is never considered when stress testing.

To top it up, like vulgar statist activists, they set a risk weight of 0% for the Sovereign and one of 100% for We the People; which translates into a belief that government bureaucrats can use bank credit more efficiently than the private sector… something which of course created the excessive indebtedness of Greece and other.

One final comment, the regulators naivety is boundless: “to whom do the benefits of improved modeling accrue? asks Ingves” Clearly there is no understanding of that bankers will, as is almost their duty, always look to minimize capital if so allowed, in order to obtain the highest expected risk adjusted returns on equity. 

When fake regulators supervise banks; totally unsupervised banks is much better.

PS. Must one go on a hunger strike to have the Basel Committee on Banking Supervision answer some very basic questions? 

Here follows my linked four tweets to bank regulators

The ex post risk of Basel Committee’s bank capital requirements, based on models based on ex ante risk perceptions, is huge!

All these capital requirements do is to seriously distort the allocation of bank credit to the real economy, for no good purpose at all.

Bank capital requirements should be based on ex post risks that considers the risks of models based on ex ante risks perceptions.

Mario Draghi, Mark Carney, Stefan Ingves, Janet Yellen, Martin Gruenberg...  Capisci?

When and where did the last bank crisis resulting from excessive exposures to something ex ante believed risky occur?

I don't know. Ask the regulators in the Basel Committee on Banking Supervision and the Financial Stability Board. 

I mean they must have much data on this because, without it, why would they impose credit risk weighted capital requirements for banks, knowing that carried the huge cost of distorting the allocation of bank credit to the real economy?

I mean that if they use the theorem that what's perceived as risky is riskier to the bank system than what is perceived as safe, then they are indeed using a loony theorem.

Or did they not look for the data?  Or did they not understand it?

The Vasa and the Basel I, II and III disasters

Stefan Ingves, the chair of the Basel Committee, in a speech titled "From the Vasa to the Basel framework: The dangers of instability" last November, said the following:

“In 1625, King Gustav II Adolf of Sweden ordered the construction of…the mighty Vasa. 

It took three years and 300 men to build the Vasa. And 40 acres of timber were consumed. 

The final result was impressive. The Vasa had two gun decks, 64 bronze cannons, and its tallest mast soared to 57 metres. The ship was the result of a quest for perfection. 

This perfection was, alas, short-lived. Tragically, the Vasa sank on its maiden voyage, after sailing only 1,300 metres, on 10 August 1628. 

After so much planning, so many resources and so much time and effort, why did the Vasa sink? According to the King, it was the result of ‘foolishness and incompetence’ 

But historians generally agree that a key factor in the Vasa's fate was the lack of stability and the hull's excessive rigidity… the Vasa was well constructed but incorrectly proportioned” 

As I read that, if the historians are right, then clearly so is the King.

And bank regulations designed by the Basel Committee, especially the risk weighing of the capital requirements, was absolutely “incorrectly proportioned”, and so to me the regulators have been foolish and utterly incompetent.

And with respect to Basel III Stefan Ingves said: “The framework has remained unchanged from Basel II across two broad dimensions: first, the way in which risk is measured - and in particular, the reliance on banks' own estimates of risk - has remained the same following the crisis; and second, the risk-weighted approaches are essentially the same as they were before the crisis"

But, in order to “address the fault lines that emerge from these two dimensions” Ingves now tells us that the regulators are working to fix that with "(i) enhancing the risk sensitivity and robustness of standardized approaches; (ii) reviewing the role of internal models in the capital framework; and (iii) finalizing the design and calibration of the leverage ratio and capital floors."

As I see it, in Vasa terms, the hull of Basel III still lacks stability, but the Basel Committee just keeps on loading more “bronze cannons” on its deck.

“Enhancing the risk sensitivity”? For God’s sake, they are still looking at the risk of the assets and not at the risk those assets pose to the banks… and so they still do not understand that the safer an asset might be perceived, the riskier it could be for the banking system.

And they still have not defined the purpose of the banks, and so they still do not care one iota about if their risk weighing distorts the allocation of credit to the real economy.

I ask, would, King Gustav II Adolf of Sweden have given the constructors of Vasa the resources to build another boat, like we allow the same regulators who designed Basel I and Basel II to now work on Basel III? I don’t think so!

And in wikipedia we read “An inquiry was organized by the Swedish Privy Council to find those responsible for the Vasa disaster, but in the end no one was punished for the fiasco.”

Lucky Stefan Ingves... in the case of the monumental failings of Basel II there has not even been an inquiry!

“A ship in harbor is safe, but that is not what ships are for.” said John Augustus Shedd, 1850-1926. Well, if built by something like the Basel Committee, it is not even safe in the harbor J

PS. Had the Vasa and the Titanic been perceived as "risky" would the outcomes have been the same? No! The outcomes were much conditioned on the ships being ex ante perceived as safe.

PS. 2015 En fråga till Herr Stefan Ingves av Sveriges Riksbank, som Ordförande i Baselkommittén

Most concerns about derivatives derive from the fact that it sounds so delightfully sophisticated

In a derivative, there is a buyer and a seller, and so whatever happens someone wins and someone loses and in essence it’s a wash out… of course as long as all can live up to their commitments. 

But, in a real market loss, like that of a lower value of a stock, a lower value of a painting, or a lower value of a real estate, there is at that time only a loser… and no winner… that is unless you count he who way back have earlier sold the stock, the painting or the house. 

And in this respect the trading in derivatives will depress much less the market than a depression of the values of the underlying vanilla assets. 

The big fuss that is raised around the issue of trading of derivatives, again, besides the possibility of one side of the trade not living up to his commitments, has much more to do with the fact that “derivatives” sounds so delightfully sophisticated when you let it roll down your tongue. 

But topping that must be the introduction of “delta, vega and curvature risk” into the discussions. Just read the index of the Basel Committee’s “Minimum capital requirements for market risk” of January 2016. Mindboggling! Do those who are responsible for what is coming out of the Basel Committee truly understand the implications of that for the banking system? 

I am quite sure that John Kenneth Galbraith’s “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”, applies to most bank regulators… perhaps to all. 

Otherwise how come the real failures of the risk weighted capital requirements for banks, are not yet even discussed?

PS. My 2019 letter to The Financial Stability Board

PS. 2024: Inviting comments the Basel Committee issued a document on Technical Amendments. On e.g., “SCO60.80: Curvature charge for Group 2a crypto-assets”, I challenge you to draft a comment that an economist like me could understand.

“delta, vega and curvature risk” Basel Committee’s member understand less and less what they are doing, by the minute

To read the Basel Committee’s “Minimum capital requirements for market risk” of January 2016 is truly mindboggling. Do yourself a favor and just look at the index.

Do those really responsible for what is coming out of the Basel Committee truly understand what is said there?

I'm sure that John Kenneth Galbraith’s “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”, applies to most of them.

And it is not like the Basel Committee has shown itself to be a good regulatory body. It has actually been one of the most failed ones… so failed that they should have been prohibited from having anything to do with bank regulations… forever.

Do you really think its current Chair, Stefan Ingves, could provide you with a lucid explanation of it?

I know enough about finance to know when our banks are being dug even deeper in the hole in which they should not be.

The regulators wrote that the bank capital requirements are portfolio invariant because … otherwise it “would have been a too complex task for most banks and supervisors alike”... and now they come with "delta, vega and curvature risk"?

PS. 2024: Inviting comments the Basel Committee issued a document on Technical Amendments. On e.g., “SCO60.80: Curvature charge for Group 2a crypto-assets”, I challenge you to draft a comment that an economist like me could understand. 

Reporters, this question could evidence whether bank regulators know what they are doing.

The Basel Committee decided that in order to make banks safe, these need to hold more capital (equity) against assets perceived as safe from a credit risk point of view than against assets perceived as risky. 

For instance in Basel II a private sector asset rated AAA to AA carried a 20 percent risk weight while an asset rated below BB- had a 150 percent risk weight. That meant banks needed to hold 7.5 times more capital against a below BB- rated asset than against a AAA to AA rated asset.

Allowing banks to leverage their equity differently based on credit risks obviously distorts the allocation of bank credit to the real economy, something that by itself could also be very dangerous for the safety of banks.

And so, the only way those risk weighted capital requirements for banks could be justified, would be if they really made banks safer.

But ask any bank regulator, like Stefan Ingves, the current Chair of the Basel Committee the following:

Sir, would you be so kind so as to provide us with one example of a major bank crisis that has resulted from excessive bank exposures to assets that were perceived as risky when placed on the balance sheet of banks.

If they cannot answer, should that not be a sufficient indication that they might have no idea about what they are doing?

I mean I can think of many instances were bankers were lulled into a false sense of security by good credit ratings, but I cannot for my life imagine bankers building up excessive exposures to something rated below BB-. Can you?

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

Excuse me Stefan Ingves. Are you a raving statist? Are you a raving communist?

In 1988, with the Basel Accord, Basel I, the bank regulators of the all important G10 decided that, for the purpose of defining the capital requirements of banks, the risk weight for the sovereign, meaning the government, was to be zero percent, while the risk weight for the private sector, meaning the citizens, was set at 100 percent. What a lunacy!

Mr Stefan Ingves, Chairman of the Basel Committee on Banking Supervision and Governor of the Sveriges Riksbank, in remarks made on May 5, 2015 to the 8th Meeting of the Regional Consultative Group for Europe, had this to say about “Sovereign risk”

“A discussion of the risk-weighted capital framework would not be complete without a discussion of the Committee's work on sovereign risk - a topic which is clearly of relevance to Europe. At its meeting earlier this year, the Group of Central Bank Governors and Heads of Supervision - the Basel Committee's oversight body - agreed to initiate a review of the existing regulatory treatment of sovereign risk, including potential policy options.

In many cases sovereign exposures are in fact relatively low credit risk assets and also highly liquid. 

Yes, they do receive a lower capital charge than other asset classes, but this is generally warranted. But - and this is an important but - 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"

For this reason the Committee will consider potential policy options related to the existing treatment of sovereign risk. It is important to note that this review will be conducted in a careful, holistic and gradual manner.”

Let me here concentrate on “Yes, sovereigns exposures do receive a lower capital charge than other asset classes, but this is generally warranted.”

Mr. Stefan Ingves, why is that generally warranted?

If sovereigns exposures receive a lower capital charge than other assets that means banks will be able to leverage more their equity and the support they receive from society when lending to the sovereign than when lending to the private sector, meaning to the citizens. 

And that of course means banks will be able to earn higher expected risk adjusted returns on equity when lending to sovereigns than when lending to the private sector, meaning to the citizens.

And that of course means banks will tend to favor lending to the sovereigns than to the private sector, meaning the citizens.

And the only possible rational explanations for that must be if you believe government bureaucrats more able than citizens to use bank credit.

Do you Stefan Ingves believe that? Are you a raving statist? Are you a raving communist?

Who has ever heard about a zero percent risk free sovereign? They even tell you in your face that they have an inflation target, so as to pay you off with money worth less and, if that does not suffice, that they will then increase your taxes to service their debt.