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

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

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

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

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

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

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

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

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

The Basel Committee's Bank Credit Principles

Bureaucrats know better what to do with credit than entrepreneurs

Better refinancing the safer present than financing the riskier future

Residential mortgages are more important than small business loans

The more creditworthy are also much more worthy of credit

Are indeed as noisy as noise can be

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

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

PS. My 2019 letter to the Financial Stability Board 

PS. Here, how my noise on bank regulations began

We need brand new bank-regulations

In "Against the Gods" Peter L. Bernstein (John Wiley & Sons, 1996) writes that the boundary between the modern times and the past is the mastery of risk, since for those who believe that everything was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant. Today, when seeing so much risk managing, I cannot but speculate on whether we are not leaving out God’s hand, just a little bit too much.

If the path to development is littered with bankruptcies, losses, tears, and tragedies, all framed within the human seesaw of one little step forward, and 0.99 steps back, why do we insist so much on excluding banking systems from capitalizing on the Darwinian benefits to be expected?

There is a thesis that holds that the old agricultural traditions of burning a little each year, thereby getting rid of some of the combustible materials, was much wiser than today’s no burning at all, that only allows for the buildup of more incendiary materials, thereby guaranteeing disaster and scorched earth, when fire finally breaks out, as it does, sooner or later.

Therefore a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.

Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size.

Extracted from Voice and Noise 2006

PS. God make us daring!

PS. Please free us from imprudent risk aversion and give us some prudent risk-taking.

Towards a counter cyclical Basel?

(A letter to the Financial Times that was not published)

Sir, the financial system is there to safeguard savings, to generate economic growth by channeling investments, and to promote equality by providing full and free access to capital and opportunities.

Currently, our bank regulators headquartered in Basel are primarily concerned with the first goal, that of avoiding bank collapses, and how could it be otherwise, if you have only firemen on the board that regulates building permits.

Now, one of these days, the financial system, neatly combed and dressed in a tuxedo, but lying more than seven feet under in the coffin of financial de-intermediation, is going to wake up to the fact that it needs the presence of others in Basel. At that moment, perhaps we might start hearing about flexible capital requirements, moving up to 8.2 % or down to 7.8% by region, in response to countercyclical needs.

Meanwhile it’s a shame that even their first goal might turn out to be elusive, since although the individual risks have fallen with Basel regulations, the stakes have increased, as those same regulations accelerate the tendency towards fewer and fewer banks.

Extracted from my "Voice and Noise" 2006