And the Academia kept silence.

Note: The Basel Committee’s use of the term “capital” in “risk weighted bank capital requirements” has sowed loads of confusions. Its real significance is “risk weighted bank shareholders’ equity/skin-in-the-game requirements". It has nothing to do with in what bank assets it’s invested.

“A ship in harbor is safe, but that is not what ships are for”. John A. Shedd, 1928. Does that not apply for banks too?

For about 600 years banks allocated credit based on risk adjusted interest rates. After risk weighted capital requirements were introduced, they allocate it based on risk adjusted returns on regulatory equity (RORE). Huge distortions ensued! 

And the Academia kept silence.

The risk weighted bank capital requirements are based on perceived credit risks and not on risks conditioned to how bankers react to perceived risks. Clearly the regulators know nothing about conditional probabilities.

And the Academia kept silence.

To delegate so much of the determination of credit risk into the hands of some few human fallible credit rating agencies, had, almost by definition, to introduce into our banking systems, a dangerous systemic risk.
And the Academia kept silence.

Lower bank capital requirements when lending to the government than when lending to citizens, de facto implies bureaucrats know better what to do with credit they’re not personally responsible for than e.g. entrepreneurs

And the Academia kept silence.

Lower bank capital requirements for banks when financing the central government than when financing local governments, de facto implies federal bureaucrats know much better what to do with credit than local bureaucrats.

And the Academia kept silence.

Lower bank capital requirements for banks when financing residential mortgages, de facto implies that those buying a house are more important for the economy than, e.g. small businesses and entrepreneurs.

And the Academia kept silence.

Lower bank capital requirements for banks when refinancing the “safer” present than when financing the “riskier” future, de facto implies placing a reverse mortgage on the current economy and giving up on our grandchildren’s future.

And the Academia kept silence.

When outlook is rosy, investment grade abounds, banks can: hold little capital, leverage a lot, obtain high returns on equity, buy back lots of shares, pay lots of dividends and huge bonuses. When rain starts, junk grades appear… banks will stand naked.
And the Academia kept silence.

And all for nothing. Those excessive bank exposures that could be dangerous to our bank systems are always built-up with assets perceived or decreed as safe, and never ever with assets perceived as risky.

And the Academia kept silence.

With risk weighted bank capital/equity requirements would the developed world have developed as much? #AI ChatGPT and Grok respond: NO!

And the Academia keeps silence.

Could it be that? “One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” George Orwell

The statist confession that shall not be heard

“Assets for which capital requirements were nonexistent, were what had most political support: sovereign credits. A simple ‘leverage ratio’ discouraged holdings of low-return government securities" Paul Volcker

And in the USA those risk weighted bank capital requirements seem to be unconstitutional

On the Nobel Prize: The Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences selects the Nobel prize winner in economic sciences. That prize was established by Sveriges Riksbank in 1968. The current Governor of said central bank, is Stefan Ingves who, from 2011 until 2019, served as the Chairman of the Basel Committee on Banking Supervision.

https://subprimeregulations.blogspot.com/2025/12/ai-chatgpt-grok-does-basel-committees.html

Could anyone arguing that what’s perceived as safe is much more dangerous to our bank system (heliocentric) than what’s perceived as risky (geocentric), be nominated for that prize by such a (Inquisition) committee? 

https://subprimeregulations.blogspot.com/2020/12/how-come-we-ended-up-with-stupid.html

PS: With the appearance ChatGPT – Grok, Academia will be asked much more on the why of its almost total silence on the outright dangerous bank regulations. Just wait until their peer reviewed papers get reviewed by #AI.

https://subprimeregulations.blogspot.com/2023/06/my-questions-to-ChatGPT-Grok-about.html

Since we know all about risks, to make your banks safe, we regulators, we the Basel Committee, we give you our risk weighted bank capital requirements. And the Academia (desperately wanting to be counted among the Pigs on Orwell’s farm) kept silence.

http://perkurowski.blogspot.com/2023/05/has-orwells-big-brother-already.html

United Nations - Human Rights: 1986 -Declaration on the Right to Development

Statist baby-boomers want us to extract all existent public borrowing capacity, leaving nothing for the future

An article by M. Barton Waring and Laurence B. Siegel titled "The Only Spending Rule Article You Will Ever Need" is introduced by Bob Dannhauser, CFA, the head of global private wealth management at CFA Institute with the following:

“Retirement portfolios can fail us in two ways: living cautiously might ‘leave too much on the table’ when our money outlasts us, but spending too much can mean running out of money before we run out of life.”

In the same way, those statist baby-boomers who scream for more debt financed government spending, taking advantage of current low borrowing rates, seem also to be doing their utmost to extract whatever public borrowing capacity they can from the current economy. You can call it placing a reverse mortgage on the economy if you want, so as to leave absolutely nothing on the table for the next generations. Our children and grandchildren will get the bill!

But, if the baby-boomers live long enough, and economic disasters result from too many bridges to nowhere being built, or just the markets catching up on the fact that even the safest haven can become dangerously over populated, then they could also end up in poverty.

Personally, since I am convinced that because of regulatory subsidies, and the use of monetary policies like quantitative easing, the current low interest rates on public debts are artificially low, I find calls for further indebtedness based on low rates to be highly irresponsible.

Moreover as statist bank regulators have decreed a 0% risk weight for the government and a 100% risk weight for We-the-risky-People, those who could really help to build future, like SMEs and entrepreneurs, are now not getting the credit our children and grandchildren need for them to get.

"Time to Borrow" August 8, 06 by Paul Krugman

Regulators told banks: "Extract all value you can from the safer past, and forget about the riskier future." And so here we stand.

Nancy Birdsall in “Middle-Class Heroes”, Foreign Affairs March/April 2016 writes:

“The fear is that the new middle class will be hit hard if it turns out that global growth was built too much on easy credit and commodity booms and too little on the productivity gains that raise incomes and living standards for everyone”

That is precisely what happened, and the awful consequences of it are already to be seen.

When bank regulators decided on risk weighted capital requirements for banks, they allowed banks to leverage their equity, and the support they received from society, much more with assets perceived or deemed as safe than with assets perceived as risky.

And that meant that banks would earn much higher expected risk adjusted returns on equity with “safe” assets than with “risky” assets.

And what is the biggest source of safeness? What we already know it, what is already here, what comes from the past. 

And what is the biggest source of riskiness? What we still do not know, what is not here, what still lies in the future.

And so banks were given the incentives to refinance the safe past, like placing reverse mortages on what had already been achieved; and to forget to finance the riskier future.

And that is destroying not only the current middle class but, much worse yet, the of our young ones, who need a great dose of risk-taking in order to have a chance for a better future.

My sincere Christmas wish: That our bank regulators wake up and understand what they are doing to our children.

On December 24, 1941, in Washington DC, Winston Churchill ended his Christmas speech to war torn England with: “By our sacrifice and daring, [our] children shall not be robbed of their inheritance or denied their right to live in a free and decent world.”

I absolutely do not pretend being something like Winston Churchill but, here in Washington, on December 24, 2015, 74 years later, I assure you all that: By us not daring to allow our banks to dare, we are robbing our children of their inheritance and denying their right to live in a free and decent world.

I pray our bank regulators in 2016 wake up to understand how much their credit risk weighted capital requirements for banks, distort the allocation of bank credit to the real economy.

By allowing banks to earn higher risk adjusted returns on what is perceived as safe than on what is perceived as risky banks do not any longer finance the riskier future but only keep to refinancing the safer past.

In essence we are placing a reverse mortgage on our economies, which will extract its value, without allowing the risk taking needed for something new to take its place.

A letter in Washington Post: Reverse-mortgaging the future

Reverse-mortgaging the future

The reverse mortgage on the economy the baby boomers allowed will forever shame their intellectual elite.

In 1988, the Basel Capital Accord introduced the concept of credit-risk-weighted capital requirements for banks. More risk, more capital — less risk, less capital. That allowed banks to leverage more, and therefore to earn higher risk-adjusted returns on equity when lending to the safe as opposed to the risky.

As a result, it also imposed a de facto reverse mortgage on the economy, which extracted the value it already contained, as banks focused more on refinancing the safer past than the riskier future.

And that also meant we refused those coming after us the risk-taking that brought us here and, in such a way, we baby boomers — or at least our elite — allowed the intergenerational holy bond that Edmund Burke wrote about to be violated. That is something the good we might have done in the 1960s will never be able to excuse.

Read what AI – ChatGPT and Grok answered in 2025, when I asked whether current bank regulations aligned with the Western Civilization

When will US Congress or Scotus review the constitutionality of current risk weighted bank capital requirements?

PS. The capacity to borrow at a reasonable cost is a very valuable strategic sovereign asset. It should not be squandered away by the generation in turn only to benefit its members, or with some non-productive investments. 

PS. In 1988, when bank regulators decreed a 0% risk-weight for US public debt, its debt was $2.6 trillion, 50% GDP. Now on way to $ 30 trillion, about 130% GDP, it still has a 0% risk weight. When do you think its risk weight should increase to 0.01%?

PS. The response to Covid is another occasion in which the holy intergenerational contract Edmund Burke wrote about is being violated.

PS. Some couples might benefit from a reverse mortgage on their house, but it would be very irresponsible for a whole nation/generation, to place a reverse mortgage on all the economy. Modern Monetary Theory (MMT) is a poisonous Love Potion Number Nine.

PS. My 2019 letter to the Financial Stability Board (FSB)

It should not be surprising if those young living in the basements of their parents’ houses one day shout out: “Ma-Pa, now it’s our turn to live upstairs, you move down to the basement!” 

This letter in The Washington Post 

My letters in the Washington Post on bank regulations:
September 6, 2007: Factors in the Financial Storm
June 20, 2008: An Aspect of the Bubble
December 27, 2009: Another 'worst': Faulty bank regulation
January 6, 2012: Handcuffed by a triple-A rating
May 1, 2013: An American approach to banking
December 23, 2014: Let the market rule on risky trades
November 11, 2015: Reverse-mortgaging the future
August 9, 2016: Banks, regulators and risk
April 16, 2017: When banks play it too safe
July 11, 2018: There is another tariff war that is being dangerously ignored.
December 30, 2018: Affordable homes or investment assets?
April 19, 2020: The capacity to borrow is a valuable sovereign asset.
November 28, 2022: Before the debt ceiling is lifted
August 22, 2023: The economic revolution

Regulators turned our banks into cash-cows milking machines

Allowing banks to lend to what is perceived as “absolutely safe” holding less capital than when lending to what is perceived as “risky”, allows banks to earn a higher expected risk adjusted return on equity when lending to what is perceived as absolutely safe than when lending to what is perceived as risky.

And that of course makes banks want to lend even more than usual to The Infallible, the sovereign and the AAAristocracy, and to lend much less than usual to what is perceived The Risky, the small and medium businesses and entrepreneurs.

And that in all essence means that banks are extracting the benefits of the risk-taking of the past, without investing in the risk-taking needs of the future.

In other words banks are using the past as a cash-cow; in other words regulators allowed banks using something like the mother of all a reverse mortgages, and which guarantees that our economies will extract as much equity it can for current consumption as is possible, and so leave much less for the next generation. 

Damn the bank regulators, nobody authorized them to do what they are doing.

God make us daring!