Sunday, September 25, 2016

Willful (or naive) blindness of epical proportions, reigns in the world of the Basel Committe’s bank regulations

Note: The following comments have been inspired by beginning to read Margaret Hefferman’s “Willful Blindness


To agree with bank regulations for which the regulators have not even defined the purpose of the banks they regulate… is that not an act of willful (or naive) blindness?

To agree with bank regulations that look to hinder banks to hold assets ex ante perceived as risky, when these kinds of assets have never created a bank crisis… is that not an act of willful (or naive) blindness?

To agree with bank regulations based on perceived credit risks, when obviously what matter are unexpected events or not perceived credit risks… is that not an act of willful (or naive) blindness?

To believe that you could place so much decision power into the hands of some few human fallibe credit rating agencies, without intriducing a systemic risk of gigantic proportions… is that not an act of willful (or naive) blindness?

Not seeing that allowing banks to leverage their equity, and the support they receive from society differently, with different assets, will produce a serious distortion in the allocation of bank credit to the real economy… is that not an act of willful (or naive) blindness?

Not seeing that curtailing the access to bank credit of the risky, more than it is already curtailed increases inequality… is that not an act of willful (or naive) blindness?

Not seeing that future generations will be affected by denying them the risk-taking that brought current generation to where its at… is that not an act of willful (or naive) blindness?

Not understanding that banks, if allowed to use their own risk models to set their capital requirements will lower these so as to maximize their expected risk adjusted returns on equity… is that not an act of willful (or naive) blindness?

Believing that some Basel I and II regulators who were totally surprised by the 2007/08 crisis have it in them to fix it with a Basel III… is that not an act of willful (or naive) blindness?

To believe that a 2007/08 crisis and the following stagnation can be cured by just throwing QEs, fiscal deficits and low interest rates at it… is that not an act of willful (or naive) blindness?

And the list of questions related to current bank regulations that gives ground to believing willful acts of blindness takes place goes on and on and on… and I might add some with time after finishing the book that inspired this. 

PS to Financial Times: To receive thousands of letters on these problems from someone that has been showned right on many letters previously published… is that not an act of willful (not naive) blindness?

Saturday, September 24, 2016

12 years after Basel II, ECB sees faults in risk weighted capital requirements for banks, but still doesn’t get it

ECB has published a document titled “The limits of model-based regulation” ECB Working Paper 1928, July 2016. In it the authors find that risk-weighted capital requirements based on sophisticated models applied by big banks, are basically dangerous and worthless.

Of course that regulation is worthless, it does not serve any useful purpose, and only increases the probabilities of financial instability.

But from its “Non-technical summary” it is harrowing to see that they still do not fully understand why these risk weighted capital requirements are dangerous; not only for the big banks with their models, but also for the smaller that apply the standard approach risk weights declared by the Basel Committee; and also, primarily, for the real economy.

For a starter it declares: “In recent decades, policy makers around the world have concentrated their efforts on designing a regulatory framework that increases the safety of individual institutions as well as the stability of the financial system as a whole.”

And so the first observation is: Who gave policy makers the right to concentrate on designing a regulatory framework that completely ignores whether the allocation of bank credit to the real economy is efficient or not? Is the real economy to serve banks or are the banks to serve the real economy? “A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926 

Then it states: “an important innovation has been the introduction of complex, model-based capital regulation that was meant to promote the adoption of stronger risk management practices by financial intermediaries, and ultimately to increase the stability of the banking system”... “banks that opted for the introduction of the model-based approach experienced a reduction in capital charges and consequently increased their lending by about 9 percent relative to banks that remained under the traditional [standard risk weights] approach”... “Back-of-the-envelope calculations (abstracting from risk-based pricing of the cost of capital) suggest that underreporting of PDs allowed banks to increase their return on equity by up to 16.7 percent”

How come regulators believed the adoption of “stronger risk management practices by financial intermediaries” would trump the maximization by banks of their risk-adjusted returns on equity? This is like given children a book with indication of calories and expecting them to stay away from the chocolate cake. Worse, in the case of the big banks applying their internal models, it was like allowing the children to calculate on their own the calories of the chocolate cake they desire. How mind-boggling naive are regulators allowed to be?

From the conclusion “Certainly, one would expect less of a downward bias in risk estimates if model outputs were generated by the regulator and not the banks themselves” one could believe the authors favor the standard approach risk weighting. 

Of course that is better than the sophisticated modelling by the big banks, which only guarantees Too Big To Fail Banks. But the all the principal faulty characteristics of the whole risk weighting process remain intact even then... and are still ignored:

Like why basing capital on ex ante perceived credit risks, when all major bank crises have resulted either from unexpected events or excessive exposures to what was ex ante perceived as safe?

Like why if banks by the size of the exposures and interest rates already clear for perceived risk, should they also be cleared for in the capital? Do not regulators understand that any risk, even if perfectly perceived, leads to the wrong actions if excessively considered?

Tuesday, September 20, 2016

Luckily credit rating agencies got it wrong and put a temporary stop on it. Otherwise we would have been much worse off

Few can really evidence having warned so much against the use of credit rating agencies in bank regulations, as I can. So I believe that should give me the right to dare to opine that the fact that the credit rating agencies got it wrong, was and is not the worst part of the current bank regulation horror story.

As for examples of the first, in January 2003 the Financial Times published a letter in which I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds. Friends, as it is, the world is tough enough.”

And, as an Executive Director of the World Bank, in April 2003, at its Board I formally stated: “Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just tips of the icebergs.”

And of course, when then the credit rating agencies later messed it up, and got it so amazingly wrong with the AAA rated securities backed with truly lousy mortgages to the subprime sector, it was a real disaster. But, I tell you, it could have been much worse, like if they had rated correctly for a much longer period.

The reason for that lies in the malignant error of the Basel Committee’s risk weighted capital requirements for banks; more ex ante perceived credit risk more capital – less risk less capital.

Perceived credit risk is the risk most cleared for by banks; they do so by means of interest rate risk premiums and size of exposures. And so when regulators decided to clear for exactly the same risk, now in the capital, that perceived credit risk got to be excessively considered. And any risk, no matter how correctly it is perceived, if it is excessively considered, will cause the wrong actions.

For instance banks were (and are) allowed to leverage much more when financing the purchase of residential houses, or when investing in AAA rated securities backed with mortgages, “The Safe”, than what they are allowed to leverage when lending to the core of the bank credit needing part of the economy, the SMEs and entrepreneurs, those who help create the new generation of jobs, “The Risky”.

And that has resulted in that banks earn much higher expected risk adjusted returns on The Safe than on The Risky; which results banks will finance much more The Safe than The Risky.

So, had it gone on (oops it still goes on) we will all end up in houses with no more houses to be built, and without that new generation of jobs that could help us, or foremost our children and grandchildren, to service mortgages and pay utilities.

So let’s be thankful the credit rating agencies got it wrong, but, please, let us also correct for the regulators' mistakes. Thinking on my grandchildren, I would in fact prefer lower capital requirements for banks when financing unrated SMEs and entrepreneurs than when financing the purchase of a house.

But how did this happen and how could it have been avoided.

Well perhaps it would have been nice if the regulators, before regulating the banks ,had defined their purpose. Then perhaps John A. Sheed’s “A ship in harbor is safe, but that is not what ships are for”, could have come to their mind.

And also it would have been nice if the regulators had done some empirical research on what causes bank crisis; and then they would have discovered that never ever excessive exposures to what is perceived as risky; and then they might have thought of Voltaire’s “May God defend me from my friends [AAA rated]: I can defend myself from my enemies [the unrated]

Saturday, September 17, 2016

If ever allowed, the following would be my brief testimony about what caused the 2008 bank crisis

The following, if I am ever allowed to give it, as so many would not like to hear it, would be my brief testimony on what caused the 2008 bank crisis 

Sir, as I have learned to understand it, the 2008 crisis resulted from a combination of 3 factors.

The first were some very minimal capital requirements for some assets that had been approved, starting in 1988 with Basel I, for sovereigns and the financing of residential housing; and made extensive in Basel II of 2004 to private sectors assets with good credit ratings.

These allowed banks then to earn much higher expected risk adjusted returns on equity on some assets than on other, which introduced a serious distortion. After Basel II the allowed bank equity leverages were almost limitless when lending to “sound” (or friendly) sovereigns; 36 times to 1 when financing residential housing; and over 60 to 1 with private sector assets rated AAA to AA. Just the signature, on some type of guarantee by an AAA rated, like AIG, also allowed an operation to become leveraged over 60 times to 1. 

The second was Basel II’ extensive conditioning of the capital requirements for banks to the decisions of some very few (3) human fallible credit rating agencies. As I so many times warned about (in a letter published in FT January 2003 and even clearer in a written statement at the World Bank) this introduced a very serious systemic risk.

The third factor is a malignant element present in the otherwise beneficial process of securitization. The profits of that process are a function of how much implied and perceived risk-reduction takes place. To securitize something safe to something safer does not yield great returns for the securitization process. Neither does to securitize something risky into something less risky. 

What produces BIG profits is to securitize something really risky, and sell it off as something really safe. Like awarding really lousy subprime mortgages and packaging them in securities that could achieve an AAA rating. A 11%, 30 years, $300.000 mortgage, packaged into a security rated AAA and sold at a 6 percent yield, can be sold for $510.000, and provide those involved in the process an instantaneous profit of $210.000

With those facts it should be easy to understand the explosiveness of mixing the temptations of limitless, 36, and more than 60 to 1 allowed bank equity leverages providing huge expected risk adjusted ROEs; with subjecting the risk-assesment too much to the criteria of too few; with the huge profit margins when securitizing something very risky into something “very safe”. Here follows some indicative consequences:

As far as I have been able to gather, over a period of about 2 years, over a trillion dollars of the much larger production of subprime mortgages dressed up in AAA-AA ratings, ended up only in Europe. Add to that all the American investment banks’ holdings of this shady product.

To that we should also add Europe’s own problems with mortgages, like those in Spain derived in much by an excessive use of “teaser interest rates”, low the first years and then shooting up with vengeance.

And sovereigns like Greece, would never have been able to take on so much debt if banks (especially those in the Eurozone) would not have been able to leverage their equity so much with these loans.

Without those consequences there would have been no 2008 crisis, and that is an absolute fact.

The problem though with this explanation is that many, especially bank regulators, especially bank bashers, especially equity minimizing bankers, especially inattentive finance academicians, especially faulty besserwissers (those who love the sophisticated taste of words like "derivatives"), they all do not like this explanation, so it is not even discussed.

The real question though is: Who is the guiltiest party, those who fell for the temptations, or those who allowed the creation of the temptations?

I mean how far can you go blaming the children from eating some of that deliciously looking chocolate cake you left on the table, at their reach?

Thursday, September 15, 2016

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?

Wednesday, September 14, 2016

Here is conclusive evidence of that current bank regulation experts, dangerously, do not know what they are doing

The risk-weight the regulators assigned in Basel II to those corporates (private sector) rated AAA to AA was 20%; and to those rated below BB- one of 150%

That might have been a correct reflection of the ex ante risks of the AAA to AAA and the below BB- rated failing but, it is definitely not the risk for banks conditioned on the bankers having seen and acted upon those perceived risks.

That is: what are the real risks considering the risks that are perceived?

That is: motorcycles are very risky, that’s why so many more people die in accidents of the safer cars.

That is: clearly the below BB- rated do not pose danger for the banking system while the AAA to AA rated to which banks could build up excessive exposures definitely do.

In other words the bank regulators assumed bankers did not perceive credit risks at all, that bankers were totally blind, and so that they, the regulators, had to shoulder that whole responsibility.

That completely distorted the allocation of bank credit to the real economy, something that represents huge dangers for the banking system and for the health of the rest of the real economy.

This amazing incompetence of the regulators, mostly of the Basel Committee and the Financial Stability Board, has remained unquestioned by most experts. Could that be because they are all suffering from an excessive confidence in fellow experts, or could it be because of what John Kenneth Galbraith once said: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.”?

You tell me!

Saturday, September 10, 2016

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.

Tuesday, September 6, 2016

Dumb G20 ministers reiterated in Hangzhou their support of the inept Basel Committee on Banking Supervision (BCBS)


“We reiterate our support for the work by the Basel Committee on Banking Supervision (BCBS) to finalize the Basel III framework by the end of 2016, without further significantly increasing overall capital requirements across the banking sector, while promoting a level playing field”

Clearly the Ministers did not dare to ask the regulators some minimum minimorum questions like:

What do you believe is the purpose of banks? Should it not have something to do with what like John A Shedd opined: “A ship in harbor is safe, but that is not what ships are for” 

If the purpose of the banks includes that of allocating credit efficiently to the real economy, why then do you distort that with risk weighted capital requirements for banks?

Can you indicate us one single bank crisis derived from excessive exposures to what was perceived as risky when incorporated to the balance sheets of banks? Voltaire said “May God defend me from my friends. I can defend myself from my enemies”. 

So, could that lack of questioning by the ministers be explained by John Kenneth Galbraith’s “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections”?

Frankly, neither Hollywood nor Bollywood, would insist in supporting the work of someone producing such Basel I-II flop, as the 2007/08 crisis and the thereafter continued stagnation evidences.

Monday, September 5, 2016

The Basel Committee imagined a theorem that allowed it to intervene in the allocation of bank credit

In Deirdre Nansen McCloskey’s “Bourgeois Equality” we read:

“Economists collect Nobel Prizes for imagining in existence theorems of this or that ‘market failure’, which they never show are important enough to justify utopian schemes of state intervention” 

Precisely what I argue is also the case when: 

Regulators imagined that what was perceived ex ante as risky, was risky for banks. 

With this theorem they justified imposing risk weighted capital requirements for banks; more perceived risk more capital – less risk less capital. 

Or, with this theorem they gave in to the banks’ wishes of being able to leverage their capital much more; like if the asset had an AAA to AA rating, a mindboggling 62.5 times to 1 

They did so without even trying in the least to ascertain if that theorem was true; something which it is definitely not. 

What are risky for the bank system are unexpected events; and that which precisely because it is perceived as safe, could,generate dangerous excessive financial exposures. 

That regulation distorted completely the allocation of bank credit to the real market; but perhaps that was what some statist regulators wanted, since the risk weights they assigned to We the People was 100%, while that of the Sovereign was set at 0%.

PS. Here an aide memoire on some of that regulatory monstrosity

Saturday, September 3, 2016

The Basel Committee injected cowardice into our bank system and doomed us all to doom and gloom.

In 1988 with the Basel Accord, Basel I, and then in 2004, with Basel II, the Basel Committee on Banking Supervision introduced risk-weighted capital requirements for banks. More perceived risk more capital – less risk less capital.


That allowed banks to leverage their equity more with what was perceived, decreed or concocted as safe, than with what was risky. That allowed banks to earn higher expected risk adjusted returns on equity when lending to The Safe, the government, housing and the AAArisktocracy than when lending to The Risky, like SMEs and entrepreneurs.

Just look at these risk weights: Sovereign = 0%, AAArisktocracy = 20% and We the People = 100%

That effectively injected cowardice into the banking system, which prevents it from allocating credit efficiently to the real economy.

There is no chance in hell capitalism can function and deliver anything good with such regulations… the regulators doomed us all to doom and gloom.

And all for nothing! There has never been a major banking crisis that has resulted from excessive financial exposures assets perceived as risky when incorporated to banks’ balance sheets. These always result from unexpected events or from excessive exposures to something erroneously perceived as safe.

And the saddest part is that this regulatory distortion is not even acknowledged, much less discussed.

Friday, September 2, 2016

Six easy questions that bank regulators should answer


What do you believe is the purpose of banks? Should it not have something to do with what like John A Shedd opined: “A ship in harbor is safe, but that is not what ships are for” 

If it includes to allocate credit efficiently to the real economy, why then do you distort that with risk weighted capital requirements for banks?

Voltaire said “May God defend me from my friends. I can defend myself from my enemies”. And so why do you base your capital requirements on what the bank perceives and not on what it has little chance to perceive?

Why do you give the AAA–AA rated a risk weight of 20% and the below BB- rated one of 150%? Do you really believe bankers could create excessive dangerous exposures to what ex ante was perceived a below BB-rated?

Why must the bank in my state hold more capital when lending to a local SME or entrepreneur, than when lending to, for instance, the German government?

By the way, is not the risk weights of Sovereign = 0% and We the People = 100%, an outrageous example of a runaway statism?

Why do you want to impose risk aversion in the Home of the Brave?

Friday, August 26, 2016

There are three causes for major bank crises. Regulators focused on one that’s not. Basel Committee & FSB... Good Job!

What are the causes of major bank crises?

1. Unexpected events, like major devaluations and natural disasters.

2. What was ex ante perceived as very safe turned out ex post to be very risky.

3. Shenanigans like unauthorized speculative trading or banks lending to their own directors or shareholders.

What did the regulators do? 

They introduced credit-risk-weighted capital requirements: more ex ante perceived risk more capital - less risk less capital... clearing agains for basically the only risk that was already being cleared for, by means of size of exposure and interest rates.

For instance, prime AAA to AA rated got 20% risk weight ,while the highly speculative almost broke below BB- rated, got a 150% risk weight...

As if banks would ever build up dangerous excessive exposures to what is below BB- rated 

Good job regulators!

Tuesday, August 23, 2016

The Basel Committee, Financial Stability Board and other frightened risk adverse bank nannies, they mandated stagnation.

When you allow banks to hold less capital when financing what’s perceived as safe than when financing the risky; banks earn higher expected risk adjusted returns on equity when financing the safe than when financing the risky; and so you are de facto instructing the banks to stop financing the riskier future and keep to refinancing the safer past… something which guarantees stagnation… a failure to develop, progress or advance… something which guarantees lack of employment for the young and retirement hardships for the old. 

I would prefer not to distort the allocation of bank credit but, if I had to, then I would try to ascertain that bank credit goes to where it could do the society the most good; in which case I would consider basing these on job creation ratings and environmental sustainability ratings, and not on some useless credit ratings already cleared for by banks with the size of their exposures and interest rates.

PS. If you want more explanations on the statist and idiotic bank regulations that are taking our Western society down, here is a brief aide memoire.

PS. If you want to know whether I have any idea of what I am talking about, here is a short summary of my early opinions on this issue since 1997.


Monday, August 22, 2016

Mr R Gandhi, ignore the Basel Committee’s mutual admiration club, and concentrate on the needs or your India.

Mr R Gandhi, Deputy Governor of the Reserve Bank of India, at the FIBAC 2016 in a speech titled “New horizons in Indian banking”, Mumbai, 17 August 2016 said the following: 

“I regret that at the very end of these two days deliberations on future of banks, I have to paint such a dismal future for your existence as banks….One big area, you vacated and / or let others to occupy by your lackluster attitude is there for your rightful reclaim, if only you make concerted and conscious effort. That is SME financing. Small and medium sized enterprises (SMEs) are a major, yet often overlooked sector by formal financial institutions. The SMEs reportedly account for more than half of the world’s gross domestic product (GDP) and employ almost two-thirds of the global work force. However, they are the neglected lot world over. As reported by the International Financial Corporation (IFC), a “funding gap” of more than $2 trillion exists for small businesses in emerging markets alone...

I can only conclude with the idea that if you make yourself socially relevant, not just relevant in economic sense alone, you can have hopes to exist”

Holy moly. unless Mr R Gandhi is simply thickheaded and does not understand, he should be ashamed of trying to blame the banks for this ignoring his own responsibilities as a regulator.

Who told banks to get out of SME financing? The bank regulators did; by requiring banks to hold much more capital when lending to SMEs than when lending to those perceived as safer. That made it difficult for banks to earn competitive risk adjusted returns on equity lending to the SMEs.

Who made banks socially irrelevant? The bank regulators did, by regulating banks without ever having defined their purpose… like that of allocating credit efficiently to the real economy.

And since risk-taking is the oxygen of any development, a developing country like India is one of those who could least afford to introduce regulatory risk aversion. Not as if those developed can either, but at least they have reached higher altitudes before starting to climb down their mountains.

In 2007, at the High-level Dialogue on Financing for Developing at the United Nations, I explained why the Basel regulations were harmful to development, and my opinion was even reprinted in October 2008 in the Icfai University Journal of Banking Law.

Sadly though, as happens with most central bankers and regulators from developing countries, they end up more interested in being accepted by their peers in the developed countries, and in belonging to their mutual admiration club, than in doing what is best for their own countries.

Basel Committee’s mindboggling naiveté: Banks, thou shall not misbehave and fudge to lower your capital requirements

In the “Statement on capital arbitrage transactions” Basel Committee newsletter No 18 of June 2016 we read:

“Transactions that are designed to offset regulatory adjustments employ a variety of strategies. For example, these may include: (1) the issuance of senior or subordinated securities with or without contingent write off mechanisms; (2) sales contracts that transfer insufficient risk to be deemed sales for accounting purposes; (3) fully-collateralised derivative contracts; and (4) guarantees or insurance policies. These types of transactions… can have the effect of overestimating eligible capital or reducing capital requirements, without commensurately reducing the risk in the financial system, thus undermining the calibration of minimum regulatory capital requirements.

Banks should therefore not engage in transactions that have the aim of offsetting regulatory adjustments.”

What a mindboggling naiveté! While regulators allow banks to hold less capital against assets perceived, decreed or concocted as safe, and the risk-adjusted return on equity is how banks compete for capital (and bonuses), how can they think banks will not do their utmost to lower the required equity?

PS. Children, listen to your Basel nannie, though there is ice-cream and chocolate cake in the fridge, she still expects you to eat the spinach and the broccoli.

PS. You want your children not to arbitrage and eat of everything... blend it all together.

PS.You want your banks not to arbitrage... set one capital requirements for all assets.

Wednesday, August 17, 2016

It is prudent for our banks to take risks on the not so creditworthy, especially if these are up to something worthy

In a recent article in the Financial Times a bank was mentioned to be “an exemplar of prudence…[because] The target loan loss ratio is zero; [and] low loan losses, in turn, allow the bank to offer competitively priced loans and personalized service to creditworthy customers.”

To me that points clearly to what’s wrong with banks nowadays. “A target loan loss ratio of zero”… might allow “to offer competitively priced to creditworthy customers” but it will clearly not offer sufficient opportunities of credit to the not so creditworthy, those which includes too many risky SMEs and entrepreneurs, but also that could help provide the proteins the economy needs to move forward, in order not to stall and fall.

And the real truth is that, in the medium and long term, the creditworthy could benefit much more by banks taking much more risks on the not creditworthy, especially if these seem to be up to something worthy, than by they just getting low priced loans.

And if to the “zero loss loan target” you then add the distortion in the allocation of bank credit caused by the risk weighted capital requirements for banks, you might get a feel for why our economies seem to stagnate. 

Those regulations require the banks to hold more equity when lending to someone perceived risky, than when lending to someone perceived safe. And so that results in banks earning higher expected risk adjusted returns on equity when lending to someone perceived, decreed or concocted as safe, than when lending to someone perceived as risky. And that signifies that, around the world, millions of “risky” SMEs and entrepreneurs are not given the opportunity they might deserve and we might need for them to get.

As is, the banking system no longer finances the “riskier” future but only refinances the “safer” past, and that is as imprudent as can be, at least for our grandchildren.

Those bankers who with reasoned audacity take chances on the future are good servants of the society. Those who only maximize return on equity by diminishing the required capital and avoiding risks are, in the best of cases, absolutely boring.

And don’t get me wrong; I do not want to endanger our banking system, it is just the opposite. The forgotten truth is that major bank crises never ever result from banks building up excessive exposures to what ex ante is perceived as risky, it is not in the nature of bankers, as Mark Twain explained in terms of sun, rain and umbrellas.

The big crises always result from unexpected event of because of excessive exposures to something erroneously considered as safe.

PS. With their risk weighted capital requirements the regulators decreed inequality.

Wednesday, August 10, 2016

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.

Paul Krugman

Tuesday, August 9, 2016

Banks and regulators don’t care about our economy


The Aug. 5 Economy & Business article “What happens when lines blur between banks, regulators” referred to several issues and conflicts of importance between banks and regulators but did not mention the prime point of agreement between all regulators and all banks: None of these actors cares about the state of the real economy.

Banks love to earn high-risk adjusted returns on equity when lending to something perceived as absolutely safe, so they love when regulators allow them to hold much less equity when lending to something perceived, decreed or concocted as safe.

Regulators love it when banks avoid taking risks, so they are more than happy to allow banks to hold much less equity when lending to something ex-ante perceived by them as safe, and therefore allow banks to earn much higher risk-adjusted returns on equity when staying away from the risky.

Our problem, though, is that we need for our banks to lend to the risky, such as small and medium-size enterprises and entrepreneurs, to keep our economy moving forward.

Regulators have never defined the purpose of the banks, so they do not care about whether these banks allocate credit efficiently to our real economy.

Per Kurowski, Rockville
The writer was an executive director at the World Bank from 2002 to 2004.


Monday, August 8, 2016

ECB, Single Supervisory Mechanism (SSM), with respect to banks, still pisses out of the pot; and McKinsey keeps mum

The declared supervisory priorities for 2016 of ECB's Single Supervisory Mechanism (SSM) with respect to banks are: “(i) business model and profitability risk, (ii) credit risk, (iii) capital adequacy, (iv) risk governance and data quality, and (v) liquidity”

As you can see, ECB still does not care one iota about the allocation of bank credit to the real economy. Not one single indication of trying to figure out what should be on banks’ balance sheets and is not.

And as you can see, ECB still thinks that if it only can make banks stay away from what is ex ante perceived as risky, all will be fine and dandy. It has no idea that what caused all bank crises has been, either unexpected events, like currency crises, or excessive exposures to something erroneously perceived ex ante as absolutely safe… never ever what was ex ante perceived as risky.

And leading consulting companies in the world, like McKinsey, play along and don't say a word, probably because they expect to profit hugely from the so inept bank regulators.

As far as consultancies go, bank regulations is the new piñata in town.

You want to know what I am talking about? Serve yourself a good cognac and read this.

Thursday, August 4, 2016

Regulators stupidly infantilized our bankers, and so we ended up with a dangerously obese economy

Jonathan Klick and Greg Mitchell  in "Infantilization by Regulation” “Cato:Regulation” Summer 2016." write:

“With the rise of libertarian paternalism has come greater acceptance of the view that citizens often fail to act in their best interests and that it is the government’s job to put a stop to that. In this mindset, the market is a predator rather than a check on stupid mistakes. 

If the behavioral assumptions behind libertarian paternalism gain widespread acceptance among policymakers, then we should prepare for an onslaught of nudges and shoves. And every time a nudge is adopted, an opportunity for learning and individual development is lost. 

Perhaps the gains from intervention will be sufficient to justify the opportunity cost, but those costs should be included in the cost-benefit analysis. Too often only the predicted benefits are considered, while the attendant long-term costs go unseen.”

Absolutely! When regulators, even knowing that bankers already cleared for perceived risks by means of interest rates and size of exposure, told bankers they also needed to clear for the same perceived risk in their capital, they essentially infantilized bankers… in a very dumb and dangerous way.

They told the bankers: “If you eat ice cream (what’s perceived as safe) then we will reward you with chocolate cake (lower capital requirements that allows for higher leverage that allows for high risk adjusted rates of return on equity); but if you eat broccoli (what is perceived as risky) then you will also have to eat spinach (higher capital requirements that causes lower leverage that causes lower risk adjusted rates of return on equity.”

And so what have we? A debt obesity crisis that was resulted caused by excessive eating of ice cream and chocolate cake… and an economy that does not want to ignite because of the lack of the nutrients present in spinach and broccoli.