The basic premise of current bank regulations is bankers are blind suicidal fools. That’s what’s really dangerous!

Right now, with the risk weighted capital requirements banks, need to hold more capital against what is perceived as risky than against what is perceived as safe. That presumes bankers are blind, dumb and suicidal. And that’s what’s really dangerous.

The real ex post dangerous consequence of something goes down the riskier it is perceived ex ante. The real ex post dangerous consequence of something goes up the safer it is perceived ex ante. 

So, if you want to introduce risk weighted capital requirements, then the real question you as a regulator need to answer is: What are the chances banks create large dangerous excessive exposures to something ex ante perceived as safe, when compared to doing the same against something perceived as risky?

And the answer to that would indicate the current capital requirements for banks are 180 degrees wrong. But regulators don’t seem to care.

And the real consequence of that mistake is not only to expose banks to stand there with little capital precisely when they need it the most, but also to dangerously distorts the allocation of credit to the real economy. 

The regulators, by allowing banks to leverage much more with assets perceived as safe, allow banks to earn higher expected risk adjusted returns on equity on what is perceived as safe, than on assets perceived as risky.

And so, as a direct consequence, millions of “risky” SMEs and entrepreneurs, those who anyhow would have gotten smaller loans and paid higher risk premiums, have been denied fair access to bank credit. 

And so, as a direct consequence of that, tens or even hundred of millions of jobs around the world and that could have benefited the next generation, had no chance of being created.

And all for nothing as the truly dangerous bank crises keep on resulting, as always, from excessive exposures to something erronously perceived as safe… like AAA rated securities.

And all this while regulators keep on congratulating themselves for how smart they are.

Damn them!

Is this what you really want?

If banks are allowed to hold less capital against mortgages than against loans to SMEs and entrepreneurs… something that they are allowed now.

Then banks can leverage their equity, and the support they receive from society, by for instance deposit insurance schemes, much more with mortgages than with loans to SMEs and entrepreneurs. 

And then banks will earn higher ex ante perceived risk adjusted returns on equity when lending to those buying houses than when lending to those who can generate the next generation of jobs.

And then banks will lend more to home buying than to job creation.

And then the citizens are doomed to end up sitting in expensive houses, with low salary jobs or no jobs at all to pay their utilities and their mortgages with.

Is this really what you want?

How do you explain to grownups the benefits of compound interests in times of zero or negative interest rates?

The Washington Post carried a story on June 21 titled “Where broke millennials go to learn aboutmoney – Financial planning for grownups.

In it its author Jonelle Marte, writes about a wine-tasting meeting organized by the Society of Grownups, in which “Stephanie Labelle was busy jotting notes as financial planner Jena Palisoul explained compound interest”.

And I was left wondering about how you go about and explain the benefits of compound interests, in times of zero or even negative interest rates.

Also, if I had been there to advise these young adults on the best way to guarantee their future I would, without a shadow of a doubt, told them to get rid of current bank regulators with their senseless risk-aversion. 

The currentcredit-risk-weighted capital requirements, make banks invest in assets much more compatible with the investment needs of a retiree with very few years of life expectancies, than with those of young grownups… those who needs banks to finance “risky” SMEs and entrepreneurs, in order to have the economy going and generating jobs.

Actually I would suggest the Society of Grownups writing the regulators a kind letter reminding them that major bank crisis are never ever caused by excessive exposures to what is perceived as risky, but always from too large exposures to what has been erroneously perceived as very safe.

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.

I am sure that for Europe’s young unemployed, all 123 European banks failed EBA’s and ECB’s stress tests… dramatically.

So now the European Banking Authority (EBA) has announce the stress test of 123 European banks… and we are informed that 12 failed. Bullshit! They all have failed. 

For instance, ECB's Vitor Constancio says “the vast majority of banks proved resilient”… and I just have to ask him… What’s good about a resilient bank that completely fails to intermediate credit correctly? ... or, as John Augustus Shedd (1850-1926) so well phrased it: “A ship in harbor is safe, but that is not what ships are for.”

It is not what’s on the balance sheets of the banks of Europe that should most concern us… it is what has been condemned by bank regulators from being on the balance sheets of banks in Europe that should really make us tremble… namely all the loans to medium and small businesses, entrepreneurs and start-ups. 

And that so extremely risky prohibition to take risks, that which has effectively castrated European banks, was imposed by the regulators, by means of their so tragically unwise credit risk weighted capital (meaning equity) requirements for banks.

And, to top it up, that will not make our banks safer in the long term... since there have never ever been major bank crises which have detonated because of excessive exposures to what, ex ante, was perceived as risky, as these have always resulted from excessive bank exposures (against too little bank equity) to what was, ex ante, perceived as absolutely safe.

NOTE: I am a happy husband, father and grandfather, with no scandalous past. 

I have a long and quite successful carrier as a financial and strategic private and public sector consultant and, in 2002-2004, I was an Executive Director at the World Bank. 

I have studied in Sigtuna SHL Sweden, Lund University, IESA Caracas, London Business School and London School of Economics. 

Since 1997 I have published over 800 Op-Eds in some of the most important newspapers in Venezuela. 

I have had many letters and articles on banking regulations published around the world. And few can claim having warned in such precise terms about the impending banking disasters as I did between 1997 and 2007. 

And I stake all my professional reputation, and the loving trust my family has shown me over the years, on the fact that current bank regulators of the Basel Committee, and of the Financial Stability Board, have been wrong. Not a pardonable 15 degrees wrong, but an unpardonable 180 degrees totally wrong.

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.

PS. 2024 AI As a grandfather, should I be concerned about how Basel bank regulators might have shaped the future my grandchildren will encounter?

Mario Draghi, Stefan Ingves, Mark Carney, Jaime Caruana and other bank regulators, you should be ashamed

Thanks to theirs and other regulators’ credit risk weighted capital requirement for banks, the risks your banks now take, are that of dangerously excessive exposures to what’s deemed as “absolutely safe”; not the true risk-taking the economy needs; and, as a consequence, Europe, which was constructed upon true risk-taking, is now stalling and falling… and its youth condemned to be a lost generation.

You young Europeans, if you want to have a chance of a better world, or a least of a not too much worse world, then go tell your regulators to immediately stop basing their capital requirements for banks on some purposeless credit risk ratings, those which are already considered by banks; and to use instead creation-of-jobs-to-young-people ratings, sustainability of planet earth ratings, and, when lending to sovereigns, ethics and good governance ratings.

Tell them that they should know that secular stagnation, deflation, mediocre economy and all similar obnoxious creatures, are direct descendants of excessive risk aversion

PS. ​Of course the risk would then be that the rating of ethics and good governance falls into the wrong hands​.

Yes Mme. Lagarde. It matters much where banks are going, and they’re being directed in the wrong direction.

Yes Mme. Lagarde. It matters much where banks are going, and they’re heading the wrong way.

Christine Lagarde Managing Director, International Monetary Fund in “The IMF at 70: Making the Right Choices—Yesterday, Today, and Tomorrow” during The IMF/World Bank Annual Meetings, Washington, D.C. October 10, 2014, states: “It matters where we want to go in order to decide which way we go.”

Indeed it matters. And that is why I ask Christine Lagarde to use her influence to ask bank regulators: where do they want our banks to go.

I say this because in all their regulations there is not on single word about the destiny of the banks, in terms of the purpose of our banks. 

And that is of course why they have allowed themselves to impose on banks “credit-risk weighted capital requirements for banks”, which introduces a sissy silly risk aversion in the banking system and which completely distorts the allocation of bank credit to the real economy.

When Mme. Lagarde presents to us a choice between stability and fragility, that is a perfect opportunity to remind all of you that the search for stability can itself produce that stiffness, brittleness and lack of flexibility, that can lead to real monstrous fragility.

When Mme. Lagarde presents to us a choice between acceleration and stagnation that is not really a choice, since the lack of acceleration, moving forward, taking risks, will make the economy stall and fall, sooner or later.

And finally when Mme. Lagarde presents to us the choice between solidarity and seclusion, I would just note that, though there is a saying that goes “better alone than in bad company”, whenever you build a wall, you cannot be absolutely sure you end up on the right side of it.

IMF, and World Bank you have an important and urgent role to perform in holding bank regulators accountable for what they have done and are doing… please do not shy away from it.

And also never forget that secular stagnation, deflation, mediocre economy, unemployment, underemployment, managed depression and all similar obnoxious creatures, are all direct descendants of risk aversion.

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

@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.

Damn you, thick as a brick bank regulators.

Even though never ever have a bank crisis resulted from excessive exposures to what is perceived as “risky”, as these have always, no exceptions, resulted from excessive exposures to what has erroneously perceived as “absolutely safe”, our thick as a brick regulators require banks to hold immensely much more capital when lending to the medium and small businesses, the entrepreneurs and start-ups, than when lending to the “infallible sovereigns”, the AAAristocracy or the housing sector… and so of course no one is out there financing the creation of the jobs our young ones so urgently need. Damn you regulators!

They, the future, they do not need sissy risk adverse capital requirements based on credit ratings, they need capital requirements based on job creating ratings, and on planet earth sustainability ratings.

They do not need a bubble in our safe past... they need bubbles in their risky future!

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! 

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 world needs regular jobs, not just jobs for bank regulators.

With their distortions of the allocation of bank credit to the real economy, which their Basel II risk-based capital requirements cause, has turned the regulators into the worst enemy of the creation of the jobs our young ones need, in order not to become a lost generation.

But it is just getting worse. Every clause I read of Basel III or Dodd Frank Act, or all thereto referenced regulations, ticks off in my mind a calculation of how many more jobs will this mean for regulators and aspiring regulators, and how many more opportunities of regular jobs will be lost because of it. 

And the ratio that keeps popping up in my mind is about 10.000 regular jobs lost for each job created for a regulator or for a bank regulation consultant.

Will anyone in UK help me file the following complaint against bank regulators through the Financial Conduct Authority?

(As a foreigner not living in the UK, if I filed it, the complaint would probably be ignored)

Below is the link for filing it:

http://www.bankofengland.co.uk/about/Documents/complaints/complaintsform.pdf

The complaint!

Even though bank capital is primarily needed in order to cover for unexpected losses, regulators have set the capital requirements based on the perceptions about expected losses.

And since the perceptions of expected losses are already cleared for by banks by means of interest rates, size of exposure and other terms, this means that perceptions of expected losses get to be considered twice.

And of course that favors those already favored by being perceived as safe, and punishes those already punished by being perceived as risky.

And of course that makes it impossible for banks to allocate credit efficiently to the real economy, with all the negative consequences that entails... among other to the job prospects of the unemployed youth.

And, to top it up, since the capital requirements are portfolio invariant, which means that these do not consider the dangers caused by excessive exposures to what is perceived as absolutely safe but could turn out to be risky, these do not foment the stability of the banking sector. 

On the contrary, these capital requirements guarantee that in the worst case scenarios, which is when banks encounter that something “absolutely safe” has become “risky”, banks will have too little capital to respond with.

These regulations are therefore destructive and should be changed.

What a bank regulator could be asking himself on his deathbed…

Even though I knew that the capital I should require a bank to hold was primarily a protection against unexpected losses… how could I have been so dumb so as to base the capital requirements on the perceptions about the expected losses?

And how could I have been so dumb so as to accept “portfolio invariant” capital requirements, which obviously does not consider the danger of excessive exposures to what is perceived as “absolutely safe”, nor the benefits of diversification among what is considered as “risky”?

That caused of course banks to make much much higher risk-adjusted returns on equity when lending to “the infallible sovereigns” and the AAAristocracy than when lending to the “Risky”.

And that caused banks to overpopulate some “safe havens” turning these into deadly traps, like AAA rated securities, Greece, real estate in Spain; and equally dangerously to under-explore the more risky but more productive bays, represented by medium and small businesses, the entrepreneurs and the start-ups.

And with all that I helped to screw up the whole Western world economy... especially Europe's

I know most of the world will not forgive me, but I sure pray for that my unemployed children and grandchildren understand that, though admittedly I was very dumb and arrogant, I did not regulate so dumb on purpose… in fact my whole problem began when I and my colleagues started to regulate the banks without even caring to define their purpose.

Mr. Alan Greenspan… tell us the story… why were your legitimate concerns waived… what really happened?

In 1998, celebrating the tenth anniversary of the Basel Accord Alan Greenspan gave a speech titled “The Role of Capital in Optimal Banking Supervision and Regulation”, FRBNY Economic Policy Review/October 1998”. Three comments stand out:

First: “It is argued that the heightened complexity of these large bank’s risk-taking activities, along with the expanding scope of regulatory arbitrage, may cause capital ratios as calculated under the existing rules to become increasingly misleading. I, too, share these concerns”

And there was Greenspan only referring to the measly 30 pages of Basel I… and so how on earth, with this type of miss-feelings, can we now have arrived to our tens of thousands of pages of Basel III and Dodd-Frank Act?

Second: “regulatory capital arbitrage… is not costless and therefore not without implications for resource allocation. Interestingly, one reason that the formal capital standards do not include many risk buckets is that regulators did not want to influence how banks make resource allocation. Ironically, the one-size-fits-all standard does just that, by forcing the banks into expending effort to negate the capital requirement, or to exploit it, whenever there is a significant disparity between the relatively arbitrary standard and internal, economic capital requirements.” 

And so here if the implications for resource allocation (of bank credit in the real economy) is considered as an issue… how on earth did they go from some risk-weights depending of the category of assets, to something even so much distortive for resource allocation as risk weights depending on credit ratings?

Third: “For internal purposes, these large institutions attempt explicitly to quantify their credit, market and operating risks, by estimating loss probabilities distribution for various risk positions. Enough economic, as distinct from regulatory, capital is then allocated to each risk position to satisfy the institution’s own standard for insolvency probability.”

And so what happened to the distinction between economic and regulatory capital? Is it not so that a regulator´s real problem begins when the economic capital is miscalculated by the banks? If so, why the hell would he then want to calculate regulatory capital as it was economic capital?

No I am sorry… Alan Greenspan… as well as his successor Ben Bernanke… and of course all the other regulators like those in the Basel Committee and the Financial Stability Board… they will have a lot of explanation to do… when history finally catches up on them.

And I would certainly not want to be in their shoes. “Daddy why was grandfather so dumb? … It is because of his stupid regulatory risk aversion that banks stopped financing the future and only refinanced the past, and which is why I and my friends now do not have jobs.”

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 present]... (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 [and timely] 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

PS. My 2019 letter to the Financial Stability Board

PS. And the Academia kept silence

In the hands of self righteous, arrogant, dumb and unsupervised bank regulators, Europe is doomed.

Let there be no doubt. Basel II did the eurozone in, but, Basel III, is fundamentally still a perceived risk-based bank regulatory regime. All its new concoctions, like Leverage Ratio, Liquidity Coverage Ratio and Net Stable Funding Ratio are, admittedly, only backstops, supplements or complements.

And this means that banks will still be allowed to hold much less capital against loans to “The Infallible”, like to sovereigns, the housing sector and the AAAristocracy, than against loans to “The Risky”, like to medium and small businesses, entrepreneurs and start-ups.

And that means, of course, banks will be making much higher expected risk-adjusted returns on equity when lending to The Infallible than when lending to The Risky.

And that means, of course, banks will not lend to the future, only refinance the past.

And that means, of course, Europe will not risk exploring sufficiently the new adventurous bays it needs in order to sustain a movement forward, and to create sturdy jobs for its youth, and will therefore die, gasping for oxygen, in dangerously overpopulated safe havens.

Europe, I cry for you. You have no idea of what you have gotten yourself into. Your banking system has been overtaken by what must be the stupidest risk-averse mentality, incapable of understanding the simple fact that what is perceived, ex ante, as “risky”, has never ever caused a major bank crisis, only what has been erroneously perceived as absolutely safe do that.

Europe, for your own sake, rid yourself of the false Pharisees in the Basel Committee for Banking Supervision and in the Financial Stability Board, as fast as you can!

God make us daring!