Tuesday, December 13, 2011

A question about the Wolfson Economic Prize

A £250,000 Wolfson Economics Prize competition has now been announced for the best answer to the following question: If member states leave the European Economic and Monetary Union, what is the best way for the economic process to be managed to provide the soundest foundation for the future growth and prosperity of the current membership? 

And, what if one believes no member state should have to leave the eurozone, because even though the eurozone undoubtedly presents many challenges, this crisis was primarily the result of bad banking regulations, and not of the eurozone? 

Let me explain. The only way the current imbalances could have resulted in building up the humongous European sovereign debt burdens, carried primarily by banks, was that the regulators allowed the banks to hold these exposures against zero or very little equity. This caused the banks to be willing to lend too much, at artificially low interest rates. 

If that is the case, at this moment, when some of the European sovereigns are rated as “riskier”, and therefore banks are required to hold more capital when lending to these, the possibilities are either that these debtors will find it much harder to work themselves out of any excessive debt position, and or, that the remaining safe-sovereign-havens also end up dangerously overcrowded. 

It is bad enough that bankers lent the umbrella to the European sovereigns when the sun was shining and now they want it back when it rains, for the regulators to do exactly the same. 

What solutions do I envision?

Perhaps a general and substantial haircut on all outstanding European sovereign debt, Germany included, which would allow the stronger countries to help out more in getting the eurozone economy going… and, of course, a total reversal, over a period of time, of the current capital requirements for banks based on ex-ante perceived risk of default, and which will go down in history as the mother of all failed and truly stupid bank regulation Maginot lines.

I have now received an answer to my query, it is: “The question stands as framed

Unfortunately, it seems that the possibility of a solution that does not mean someone being expelled from the eurozone, is not acceptable.

Monday, December 12, 2011

Occupy Wall Street? Occupy RBS? No! Occupy the Basel Committee! Hell, occupy FSA and the Dodd-Frank Act too!

I have not read yet in full FSA’s report on the failure of RBS, but I know what it does not include, the admittance of the fundamental mistake committed by the bank regulators, because that mistake is kept, alive and kicking, in Basel III.

Simplified, if the cost of funds for RBS was 2 percent; if it wanted to earn a 1.5 percent margin; if the cost of analyzing the credit worthiness of a small business in the UK was 1 percent; and if the risk that this borrower would default was perceived as 3 percent, then RBS would charge the small business in the UK an interest of 7.5 percent.

And if the cost of funds for RBS was the same 2 percent; if it wanted to earn the same 1.5 percent margin; if the cost of analyzing the credit worthiness of Greece was zero, because that is paid by Greece to the credit rating agencies to do; and if the risk that Greece would default was perceived as 1 percent, then RBS would charge Greece an interest of 4.5 percent.

If RBS bank was required to have about 8 percent in capital against any loan, and could therefore leverage its capital about 12 times, RBS could then expect to earn 18 percent on its capital when lending to a small business in the UK or when lending to Greece.

But that was before the bank regulators of the Basel Committee, and FSA, intervened and messed it all up.

Because the bank regulators, ignoring the empirical evidence that bank crisis never occur because of excessive exposures to what was considered risky but only because of excessive exposures to what was considered as absolutely not risky, with their Basel II, told RBS: “You RBS, if you lend to a “risky” small business in the UK you must have 8 percent in capital, but, if you lend to an infallible Greece or anyone else similarly risk-free, you only need to have 1.6 percent in capital”.

And because that 1.6 percent allowed for a leverage of more than 60 times when lending to Greece, RBS, though it still could earn a decent 18 percent on its capital when lending to a small business in the UK, suddenly RBS could expect to earn 90 percent on its capital when lending to Greece or similar. Hell, RBS could even afford to lower the interest rate it charged Greece and still earn more when lending to Greece than when lending to a small business in the UK.

And of course RBS, as did all banks in the Western world, started running to the officially perceived safe-havens of Greece, Italy, Spain, triple-A rated securities and other, where they could earn much more on their equity; and of course the governments of the safe-havens could not resist the temptations of cheap and abundant loans, and all these safe-havens became dangerously overcrowded… while the small business in the UK found it harder and much more expensive to access any bank credit… and while the too big to fail banks grew even bigger.

And, many years into a crisis that has the Western World in a freefall, this issue is not even discussed, and the same failed bank regulators are allowed to work on Basel III, using the same failed loony and distorting ex-ante perceived risk of default based capital requirement discrimination principle.

And when Adair Turner, the Chairman of FSA, in the report on the failure of RBS now states “These prudential regulations have been changed radically since the crisis, with the internationally agreed Basel III standards” he is not referring to this problem.

And this problem has been known, for a long time, just as an example the Financial Times published two letters of mine that clearly warned about what was going to happen. In January 2003, “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” and, in October 2004, “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)?


Occupy Wall Street? Occupy RBS? No! Occupy Basel! Hell, occupy FSA and the Dodd-Frank Act too!

Wednesday, November 23, 2011

I accuse the bank regulators... they caused the crisis!

If risk models, credit ratings and market intuitions were perfect, then a bank would really not need any capital at all, since all risk considerations would have been correctly priced, in the interest rates, in the amounts and in the duration of the loans. But, since risk-models, credit ratings and market intuitions are often not perfect, the regulators needs to require the banks to hold some capital, to make sure that there is an adequate cushion provided by the shareholders who are profiting from the bank activity, before creditors and tax payers are called upon to help out. 

Unfortunately the current generation of bank regulators, stupidly, did not base their capital requirements for banks on the possibility of mistakes, but on precisely the same risk models, credit ratings and market intuitions… requiring for instance minimal equity when the perceived risk of default of a borrower seemed minimal.

And it is precisely there, where the perceived risks of default seem minimal, where the risks for a systemic bank crisis resides, as what is ex-ante perceived as “risky” does never grow into a dangerously sized exposure.

And so, instead of helping to cushion for the mistakes of the banks, the regulators, with their distortions, increased the probabilities of the mistakes being made, and their negative financial consequences. 

And that they did by allowing banks to hold only 1.6 percent in capital when investing in triple-A rated securities or lending to sovereigns like Greece, which implied an authorized leverage of 62.5 to 1, while at the same time requiring the banks to hold 8 percent in capital when lending to job creating small businesses and entrepreneurs, an authorized leverage of 12.5 to 1. And that they also did by allowing the banks to lend to the “infallible sovereigns” against no capital at all, where not even the sky was the limit on leverage. 

And that is why we got those monstrous large bank exposures to what was ex-ante officially perceived as not risky, and which have now, ex-post, exploded in the whole Western World. 

And that is why the “risky” small businesses and entrepreneurs find access to bank lending so curtailed and expensive.

The bank regulators need to be held fully accountable for what they did, because if we do not get to the bottom of this sad affair, neither won’t we get out of it.

Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Monday, November 14, 2011

The lunacy and the obscenity of current bank regulations

If risk models, credit ratings and market intuitions were perfect, then a bank would really not need any capital at all, since all risk considerations would have been correctly priced, in the interest rates, in the amounts and in the duration of the loans. But, since risk-models, credit ratings and market intuitions are often not perfect, the regulators should require the banks to hold some capital, to make sure that there is an adequate cushion provided by the shareholders who are profiting from the bank activity, before creditors and tax payers are called upon to help out.

Unfortunately the Basel Committee generation of bank regulators, did not base their capital requirements for banks on the possibility of mistakes, but on precisely the same risk models, credit ratings and market intuitions… requiring for instance minimal equity when the perceived risk of default of a borrower seemed minimal. In other words instead of helping to cushion for the mistakes the regulators, with their distortions, increased the probabilities of mistakes being made, and their financial consequences.

Also, the obscene bank bonuses, based on obscene bank profits, are more the product of some obscene low capital requirements, than the product of good banking. If you earn an expected margin of 1 percent lending to Greece, and leveraged that on your capital 62 times, as the banks were explicitly authorized to do, then your expected return on that bank equity would be 62 percent a year… who would not lend to Greece?

The bank regulators, who are the ones most responsible for causing the current financial crisis that is menacing the Western World, need to be paraded down Fifth Avenue and Champs-Élysées wearing cones of shame… and to be barred, for life, from all regulatory activity.

We urgently need regulators who also understand that risk-taking by the banks is like oxygen to our economies, and therefore understand the need for not rewarding any excessive risk-adverseness... so as to also avoid, the so dangerous overcrowding of the ex-ante safe havens.

Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Friday, November 11, 2011

What Niall Ferguson left out

Niall Ferguson in “Civilization: The West and the Rest” argues that the west's ascendancy, is based on six "killer apps": competition, science, democracy, medicine, consumerism and the work ethic. Those are indeed ingredients, but unfortunately he misses the willingness to take risks... the oxygen of development. 

Perhaps he does not remember psalms calling out “God make us daring”… and that is why he fails to understand how the bank regulators, with their stupid nanny-scared capital requirements, based on doubling up the importance of ex-ante perceived credit risks, are now slowly but surely taking the Western World down. 

Ps. Here’s a link to… Who did the eurozone in? http://bit.ly/t3mQe0 and as you will read, it really was the butlers… and here´s also a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi


And here a comment added December 28, 2015 

In 1988, Basel I halted the ascendancy of the Western civilization and, in 2004, Basel II provoked its fast descent.

In the preface of the book Ferguson writes:

"It was about the first decade of the twenty-first century, just as it was drawing to a close, that I really got the point: that we are living through the end of 500 years of Western ascendancy”

Not a bad estimate. The ascendance stopped in 1988, with the Basel Accord, Basel I, when regulators introduced risk weighted capital requirements for banks and decided that the risk weight for sovereigns was zero percent while for the private sector 100 percent; and then a truly fast descent began when in 2004, with Basel II, they split up the private sector with risk weights  that ranged from 20 to 150 percent, depended on the credit ratings.

That allowed banks to leverage more with “safe” assets than with risky assets; which meant they could earn higher risk-adjusted returns on safe assets than on risky; which meant they built up excessive exposures to what is perceived or deemed to be safe, and ignored what is perceived as risky, like lending to SMEs and entrepreneurs.

And anyone who understands that risk taking is required to keep the economy moving forward so as not to stall and fall, can understand the sad results of it all.

And that it affects primarily the western civilization, is explained by the fact that it possesses the largest amount of “safe” assets than banks can leverage up on, while holding on to the illusion that all is fine and dandy.

Thursday, November 10, 2011

Who did the eurozone in?

There are of course many suspicious characters to blame for the eurozone’s pains, not the least the fact that it was created without any strong fiscal root system.

In November 1998, in an Op-Ed titled “Burning the bridges in Europe”, which title had to do with the fact there no escape-route from the euro had been considered. I also wrote there: “That the European countries will subordinate their political desires to the whims of a common Central Bank that may be theirs but really isn’t, is not a certainty. Exchange rates, while not perfect, are escape valves. By eliminating this valve, European countries must make their economic adjustments in real terms. This makes these adjustments much more explosive.”

But, there is one huge piece of evidence that is ignored by most of those trying to explain the current troubles. That evidence is the “risk-weights”, the smoking-gun which we find in the hands of the butlers in charge of regulating the banks, and who have their quarters in the Basel Committee for Banking Supervision. Yes, it was some butlers who did the eurozone in! 

The bank butlers, naturally concerned about the safety of the banks, imposed a basic bank capital requirement of 8 percent; applicable for instance when banks lent to European small unrated businesses. In this case that limited the leverage of bank equity to a reasonable 12.5 times to one. 

But, when banks lent to a sovereign, with credit ratings such as those Greece-Portugal-Italy-Spain had during the buildup of their huge mountains of debt, the bank butlers, because this lending seemed so safe to them, and perhaps because they also wanted to be extra friendly with the governments who appointed them, they applied a “risk-weight” of only 20 percent. And that translated into an amazingly meager capital requirement of 1.6 percent; and which allowed the banks to leverage their capital when lending to the infallible a mind-blowing 62.5 times. 

The result was that if a bank lent to a small business and made a risk-and-cost-adjusted-margin of 1 percent, it could earn 12.5 percent a year, not much to write home about. But, if instead it earned that same risk-and-cost-adjusted-margin lending to a Greece, it could then earn 62.5 percent on your bank equity… and that, as you can understand, is really the stuff of which huge bank bonuses are made of, and also the hormones that cause banks to grow into too-big-to-fail. 

And, as should have been expected, the banks went bananas lending to “safe” sovereigns. With such incentives, who wouldn’t? Just the same way they went bananas buying those AAA rated securities that were collateralized with lousily awarded mortgages to the subprime sector, and to which the bank-regulating-butlers also applied the risk-weight of 20 percent. And of course the governments also went the way of the banana-republics, and borrowed excessively. What politicians could have resisted such temptations? 

And it was these generous financing conditions, and all the ensuing loans, which helped to hide all the misalignments and disequilibrium within the eurozone… until it was too late. 

Now how could these bank-regulating-butlers do a criminally stupid thing like that? The main reasons were: the bank butlers only concerned themselves trying to make the banks safe, and did not care one iota about who the banks were lending to and for what purpose; they ignored that banks were already discriminating based on perceived risks so what they were doing was to impose an additional layer of risk-perception-discrimination; they completely forgot that no bank crisis in history has ever resulted from an excessive exposure to what was considered as “risky”, but that these have always been the consequence of excessive exposures to what, at the moment when the loans were placed on the banks balance sheet, was considered to be absolutely “not-risky”. 

Also, when the bank-regulating-butlers decided to outsource much of the risk-perception function to some few credit-risk-rating-butlers, two additional mistakes were made. First, they completely forgot that what they needed to concern themselves with was not with the credit ratings being right, but with the possibility of these being wrong; and second, that what they needed most needed to look at was not so much the significance of the credit ratings meant, but how the bankers would act and react to these. 

And the consequences of these regulatory failure in the eurozone, are worsening by the day, or by the nanosecond… because these bank capital requirements have the banks jumping from the last ex-ante-officially-perceived-no-risk-sovereign now turned risky, to the next ex-ante-officially-perceived-no-risk-sovereign about-to-turn risky … all while bank equity is going more and more into the red… and becoming more and more scarce. 

What could be done? One solution could be that of declaring a ten year new capital requirement moratorium on all current bank exposures; allowing the banks to run new lending with whatever new capital they can raise, while imposing an equal 8 percent capital requirement on any bank business, no risk-weighting. If there’s an exception, that should be on lending to small businesses and entrepreneurs, in which case they could require, for instance, only 6 percent of capital, because these borrowers do not pose any systemic risk, and also because of: when the going gets to be risky, all of us risk-adverse need the “risky” risk-takers to get going. 

But that requires of course a complete new set of bank-regulating-butlers… as the current should not even be issued any letters of recommendations. Let’s face it, after such a horrendous flop as Basel II, neither Hollywood nor Bollywood, would ever dream of allowing the same producers and directors to do a Basel III, and much less with only small script changes and the same actors.

The saddest part is that many of those in charge of helping Europe to get out of the current mess that they helped to create, might be busying themselves more with dusting off their own fingerprints.

If there is any place that deserves an occupation... that is Basel!

PS. Years later I learned that all this was just so much worse. EU authorities had assigned all eurozone sovereigns’ debts a 0% risk weight, even Greece’s, even if they were all taking on debt denominated in a currency that was not denominated in their own domestic/printable fiat currency. Unbelievable! And then EU authorities put the whole blame for Greece's troubles on Greece and did not even consider paying for the cost of their own mistake. Is that a way to build a union? No way Jose!

Monday, November 7, 2011

The G20 Cannes Action Plan for Growth and Jobs, is just the continuation of sheer bank regulatory lunacy

Basel I, II, II.5, III are almost exclusively based on stimulating the banks to lend to what is ex-ante perceived as “not-risky”, like triple-A rated securities and "infallible sovereigns", precisely the terrains where all systemic bank crisis like the current one occur; and which therefore creates disincentives for bank lending to what is ex-ante perceived as “risky”, like the small businesses and entrepreneurs… those who can provide us with the next generation of jobs. 

Therefore, to include in a statement titled “Action Plan for Growth and Jobs”, “We commit to the full and timely implementation of the financial sector reform agenda agreed up through Seoul, including: implementing Basel II, II.5 and III along the agreed timelines”, is just the continuation of sheer bank regulatory lunacy

What about capital requirements for banks based on job creation ratings?

Friday, November 4, 2011

Poor "systemic irrelevant financial institutions"

So now except for 29 banks all the rest have de-facto been qualified as systemic irrelevant financial institutions. Is this going to make the lucky few less too-big-to-fail? Against a requirement of only 1 to 2.5 percent in additional equity, to be paid in comfortable installments? They've got to be kidding! 

Please, someone, save us from these regulators who keep digging us deeper and deeper in the hole where they've placed us.

Tuesday, November 1, 2011

Greece, a great referendum… one more!

Of course the timing is lousy, but I believe the referendum proposed by Greek Prime Minister George Papandreou to be the absolutely correct thing to do… better late than never. The bail-out deal offered to Greece can only be successful if it can count with the legitimacy of the full approval of the Greeks, otherwise not even a 90 percent haircut could be enough. On the contrary, not doing the referendum would, de-facto, mean giving in to those who are opposing the current bail-out agreement. Should they vote yes or no? That is entirely for them to decide.

By the way, I would also like to see a referendum in Greece, and in the rest of Europe, regarding whether to keep in their posts, or fire without any sort of letter of recommendation, all those bank regulators in the Basel Committee who allowed the European banks to lend to a Greece, Italy, Portugal… against only 1.6 percent in capital, meaning authorizing the banks to leverage their equity over 60 times when lending to the politicians of these sovereigns…

Sunday, October 30, 2011

How unfair, bankers just followed orders, and they are now being trashed

The bankers obediently went to where the regulators wanted them to go, where the regulators allowed them to leverage bank equity 60 times and more, like when buying AAA rated securities backed with mortgages to the subprime sector, or lending to for instance Greece, Portugal, Italy and Spain; and, likewise, obediently stayed away from those risky small businesses and entrepreneurs, where the regulators only allowed them to leverage bank equity 12 times. 

PS. Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Thursday, October 27, 2011

We can count ourselves lucky golf is not regulated by a Basel Committee

Current bank regulations:
Those perceived as safe, who therefore have easier access to credit, lower bank capital requirements. 
Those perceived as risky, who therefore have less access to credit, higher bank capital requirements. 


"I play with friends, but we don't play friendly games." Ben Hogan 

In reference to the recent published history of the Basel Committee of Banking Supervision (early years 1974-1997) by Charles Goodhart, I must say that we golf players, who enjoy a handicap system that allows us bad players to play against the good ones, should feel very lucky that system did not fall in the hands of something like a Basel Committee of Golf Supervision. 

Had that happened and had that Committee followed the same mentality as the BCBS, we could have ended up with a system that allows good players extra strokes and takes away strokes from the bad, which, in essence is what the current capital requirements for banks based on ex-ante perceived risk do. 

The end result of such a system would be to little by little weed out all bad players until only the best one was left standing, victorious, but with no friend to play with.

Likewise current bank regulations are little by little eliminating the access to bank credit to those perceived as “risky” and concentrating it in lesser and lesser borrowers perceived as not-risky. 

In this respect, having weeded out all “risky” small businesses and entrepreneurs and now doing the same to sovereigns, like falling domino pieces, the US dollar might end up as the last absolute-risk-free-borrower-standing, but what’s the use of that if he then has no friend to play an "unfriendly" game with?

PS. Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Wednesday, October 26, 2011

'Pour sunlight on lousy bank regulations' says ex World Bank director

http://www.citywire.co.uk/global/pour-sunlight-on-lousy-bank-regulations-says-ex-world-bank-director/a535281

The egos of bank regulators that don’t want to be hurt stand in the way of a solution to Europe, and others.


In the financial sector the truly dangerous systemic risks reside only in the DNA of what is perceived as having a low risk. That is what our bank regulators failed to see, and their hurt egos now stand in the way of finding solutions to the European crisis, as they refuse to cut off the gas that has caused and is stoking the fires.

The capital requirements for banks based on perceived risk, together with the extreme scarcity of bank capital, is forcing the banks out of anything that is becoming perceived as more risky and into what for the time being is still perceived as less risky.

That is making the financing of what is already perceived as risky so much more difficult, while at the same time creating the excessive exposures to the last standing absolutely-not-risky borrower, who will then turn into the mother of all risks.

How can we make them swallow their pride and act before it is too late?

PS. Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi



Monday, October 24, 2011

Current bank regulations cause criminal harm to the economies.

Our banks must currently submit to regulatory capital requirements that are based on the ex-ante perceived risk of borrowers. The higher that perceived risk, the higher the capital, and vice-versa. 

This amounts to an odious and arbitrary regulatory discrimination against those borrowers perceived as “risky” and which serves absolutely no purpose and on the contrary causes serious damages to the world economy. These regulations have both caused the current crisis and are hindering the recovery, and they need to be denounced. 

Those borrowers that are considered as “risky”, like the small businesses and entrepreneurs, already pay the cost for that in the markets, primarily by means of having to pay higher interest rates and less access to bank credit. 

Those borrowers that are considered as “not-risky”, like the triple-A rated and “strong” sovereigns, already receive the benefits from that, primarily by means of having to pay lower interest rates and having more and easier access to bank credit. 

Allowing then the banks to leverage more their capital and thereby earn more risk-adjusted interest rates when lending to those perceived as “not-risky”, imposes on those perceived as “risky” the need to make up the difference in the opportunity for returns on equity to the banks. 

Even those perceived ex-ante as “not-risky” can be hurt, as is the case of Greece, where obviously the fact that banks could lend to it against only 1.6 percent in capital, created artificially favorable conditions for an excessive build up of debt. 

That those capital requirements beside the damage they cause serve absolutely no purpose can easily be ascertain by the fact that never ever has bank lending to those perceived ex-ante as “risky” originated a bank crisis.

PS. Here´s a video that explains a fraction of the stupidity of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Sunday, October 23, 2011

Lord Adair Turner on the Euro

Lord Adair Turner recently said “the thing that has gone wrong is the way we've encouraged Italian banks to hold to Italian debt” 

And so much more with their outright stupid capital requirements for banks based on perceived risks. These drove the banks to excessive exposure to “no-risk-land”, that land which as an example included the AAA rated securities and Greece, precisely the land that they, as regulators, should now is where all the excessive exposures and unpleasant surprises and systemic bank crises occur, while at the same time driving away the banks from helping out those in “risk-land”, where all the small businesses and entrepreneurs live, and in which never ever has a bank crises occurred. 

How much in extra interest rates, or in less access to credit, have the job creating small UK businesses and entrepreneurs have had to pay over the years, just because of Lord Turner and his chums’ regulatory nanny like anti-perceived-risk bias 

And here he is still “not advocating any deviation from the path set by Basel” 

Still I guess we can count ourselves lucky that Lord Turner is not also in charge of the golf handicap system, because if so, he would long ago killed that popular sport by allowing the good players like you more strokes, while taking strokes away from bad players like me.

PS. If you allow here´s a video that explains part of the craziness of our bank regulations http://bit.ly/mQIHoi


Saturday, October 15, 2011

If only those of Occupy Wall Street knew

Just think about what those in Wall Street could be saying for if they really knew what they were talking about… Then they could for instance be asking for capital requirements for banks based on job creation ratings, because, if as tax payers we are to be the ultimate pick-uppers of any bank crisis, then we should at least be certain that the purpose of the banks is acceptable to us. 

Right now, the only purpose for the banks that the regulators have de-facto defined, by means of some ridiculous low capital requirements when lending to what is ex-ante perceived as not risky, and which allows for immensely high leverage of bank equity, is for the banks to make huge profits… and that, as purposes come, seems both vulgar and dumb, to say the least.

(Dumb because never ever do systemic bank crises occur as a result of excessive exposures to what is perceived as “risky”, these only result from excessive exposures to what is ex-ante perceived as “not-risky”, which is in fact the only perception that has the ability to generate huge unpleasant surprises.)

(Unfortunately there are many comfortable pseudo-truths about this crisis being pushed by various agendas, and so that the real truth, and that would be so embarrassing for the regulators, is taking a long time to come out.)

If you allow me here is a video explaining current regulatory madness it in an apolitical red and blue! http://bit.ly/mQIHoi

Friday, October 7, 2011

Should not Basel bank regulators have at least a B.A. in regulations?

I am just a humble MBA and which is why even though I more than almost anyone warned publicly about that the current financial crisis was doomed to happen as a result of Basel II, I do not get invited to explain my arguments at all those seminars at the World Bank, IMF and other high places, where so many the Monday morning quarterbacks PhDs get to be invited to speak, year after year,… but that’s ok, c’est la vie… or at least c’est la vie moderne. 

That said I ask though, should not bank regulators, like those in the Basel Committee at least be required to have a B.A. in regulations before going global with their occurrences? Or is there such a thing like a Master or a PhD in regulations? 

I say this because the current bank regulators did not behave like sensible and prudent regulators. Let me give you just but three of the so many examples: 

Should not bank regulators be more concerned about credit ratings being wrong than being correct? Of course they should, but the current bank regulators construed their regulations around capital requirements for banks based on the ex-ante perceived risks being correct. 

Should not bank regulators be more concerned about how bankers react to the ex-ante perceived risks? Of course they should, but the current bank regulators construed their regulations around their own reactions to ex-ante perceived risks. 

Should not bank regulators know that the only bank exposures that can grow so excessively as to generate a systemic crisis, the only ones able to generate huge unpleasant surprises, are the exposures to what is ex-ante perceived as “not-risky”? Of course they should!

In short, we do not need regulators who substitutes for bank and financial experts, we need regulators who complement bank and financial experts.

Here is a video that explains a small portion of the craziness of our current bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Where were the Universities when global bank regulations were designed?

There can be little doubt about that banks are one of the most important actors in the financial system, perhaps even the most important. By means of the Basel Accord of 1988, a proposal in June 1999 for a new capital adequacy framework, and the release of Basel II on 26 June 2004, more and more banks around the world were set to follow the same global regulations… and this is clearly impacting the area of finance, in many ways, more and more each day. 

That said, because of some strange and inexplicable reasons, the issue of bank regulations has been basically ignored by our universities, and most, or perhaps even all of the MBAs, graduate without the faintest idea about the existence of capital requirements for banks that distort immensely the flows of financial resources. 

Why is that? Why do they consider so often in the study material other distortions like tax deductibility for the service of debt but not for equity, and not this regulatory distortion? Had they´ve done so, then perhaps the academicians would have long ago denounced the outright stupidities that, courtesy of the Basel Committee for Banking Supervision, have been introduced in the current bank regulations. Had the Universities taken an interest in this matter we most probably would not be suffering the current crisis, at least not in its current systemic form.

Here is a video that explains a small portion of the craziness of our current bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Sunday, October 2, 2011

The Ph.D. dissertation on Basel II Bank Regulations and their capital requirements for banks that I would like to do.

In November 1999 in an Op-Ed in the Daily Journal of Caracas I wrote “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse, of the only remaining bank in the world” And indeed, in 2007-08, one Big Bang occurred… in my opinion as a direct result of Basel II. 


I would now like to do a Ph.D. dissertation on the subject of how the capital requirements for banks of Basel II and which based on the regulators’ fixation with the ex-ante perceived risks of default, introduced serious distortions in the financial markets that caused the current bank and financial crisis. 
Abstract 

Banks lend to clients adjusting the interest rates they charge, the amounts they lend, the duration of the loans, and the scrutiny they give the borrowers, to what they perceived is the risk of non-payment, a perception which obviously includes the information provided by the credit rating agencies. 

But when bank regulators introduced capital requirements for banks that were also based on the ex-ante perceived risk of default, these allowed the banks to hold much less equity when lending to those perceived as “not-risky” than when lending to the “risky”. 

That resulted in that banks were then allowed to leverage their equity much more with the risk-adjusted interest rates when lending to the “not-risky” than what they can do when lending to the “risky”. 

And that in its turn resulted in that banks could earn much higher returns on their equity, ROE, when lending to the “not-risky”, like the “solid” sovereigns and triple-A rated private borrowers, than when lending to the “risky”, like the not-so-solid sovereigns, small businesses and entrepreneurs; and or, that the interest spread between the “not-risky” and the “risky” widened considerably. The “not-risky” are charged lower interest rates than what they would be charged in the market absent these regulations, and, vice-versa, the “risky” are charged higher interest rates than what would otherwise been the case. 

These capital requirements do nothing to reduce the risks of a bank crisis, as these have always occurred because of excessive bank exposure to what had erroneously been perceived ex-ante as not risky; while at the same time they dangerously discriminate against some of the most important and dynamic participants in an economy. 

In this respect these capital requirements stimulated the creation of excessive bank exposures to sovereigns and triple-A rated, that which detonated the crisis; and they are also, by making it harder for small businesses and entrepreneurs to access bank credit at competitive rates, hindering the economy from getting out of the crisis. 

The above thesis could be demonstrated through research analyzing how the interest rate spreads between bank exposures to the “not- risky” and the “risky”, the leverage of the banks and the ROE has responded to the changes in the capital requirements. 

Some capital requirements for banks that discriminated for risk were already in existence as a result of Basel I, but the most extensive use of it came with Basel II, which was approved by the G10 countries in June of 2004. Therefore analyzing and comparing in some detail the two years of banking previous to June 2004 with the two years of banking thereafter should yield quite conclusive evidence as to who are to blame. 

Had the regulators not with a certain degree of hubris assumed the role of risk-managers for the world, arbitrarily toying around with their risk-weights, then quite probably another type of crisis could have ensued, as a result of many existing macro-economic disequilibrium, but none as severe, systemic and destructive as the current one. Just for a starter the demand for AAA rated securities backed by mortgages awarded to the subprime sector, would not have been a fraction of what it ended up to be. Just for a follow up, European banks would never ever have loaded up so much on the sovereign debt of Greece.


Now what I need to find is the university and the professors willing to give my thesis a chance, hopefully close to Washington D.C. where I currently reside, though these days I guess much of it could be done through the web too. 

Is there anyone out there willing to lend me their support?

PS. If you allow me here is a video that explains a small part of the craziness of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Sunday, September 25, 2011

My proposal on capital requirements for banks

The Basel II bank regulations were built upon the pillar of a basic capital requirement of 8 percent, adjusted with risk-weights, based on the ex-ante perceived risk of default. Higher perceived risk, higher capital, and lower perceived risk lower capital. 

I have for years argued that this serves no useful purpose, and that it is outright dangerous because it stimulates the creation of excessive exposure to what is perceived as “not-risky” which is precisely what has caused and will cause all bank crises. Current Basel III proposal does nothing or very little to correct this fundamental fault. Here is what I propose. 

First of all, the capital requirement for all type of bank assets should be the same, for instance 8  to 12 percent, and this because the regulator has no role acting like a supreme risk manager for the world by arbitrarily assigning risk-weights, and which can only bring confusion to the market. 

But also if we want to try to have the banks fulfill their societal purpose, we could contemplate reducing somewhat those capital requirements, for instance with up to 4 percent, when the banks engage in loans that for instance serve the creation of jobs or environmental sustainability. 

The above is because if we taxpayers are going to shoulder some of the risks of a bank failing, as we indeed must, then we should at least make certain that if a bank fails, it does so while trying to do something useful for us.

Of course we need a transition period in order to allow the banks to obtain all that capital they should have held, had it not been for the minuscule risk-weights assigned by the regulator. And, in order not to squeeze those perceived as “risky”, like the small businesses and entrepreneurs, more than they are being squeezed, we should, during this transition period, reduce the basic capital requirement, for instance to 5 to 6 percent, which allows for a leverage of 20 to 1. 

A temporary reduction in the basic capital requirement would clearly create some risk, but so does government stimulus financed with public debt, and I firmly believe it is preferably to have our banks take the lending decisions than government bureaucrats.

Thursday, September 22, 2011

My question at the Civil Society Townhall Meeting at the IMF and the World Bank:

The following is the question I made on September 22, at the Civil Society Townhall Meeting at the IMF and the World Bank: 

“Mme Lagarde, Mr. Zoellick, if bank regulators had defined a purpose for our banks, before regulating these, we might have had a different bank crisis, but none as large, systemic and dangerous as this one. 

And so I ask the World Bank and the IMF, our global development and stability agents, when are you going to require the regulators in the Basel Committee to openly and explicitly define the purpose of our banks… so as to see if we all agree.”

And Mme Lagarde answered: 

“On the purpose of banks, it is a very good debate to have, and it is one that I think the Vickers Commission Report is actually helping to build--what are banks for, and what are the state guarantees or general deposit guarantees intended for? Is it to actually guarantee the savers and the depositors, or is it something that is intended to fuel and benefit other activities that are really within a completely different realm of activities? 

My sense is that the most critical mission for the banks--and that is what we are trying to say when say that banks have to rebuild their capital buffers--is to actually finance the economy, first and foremost, and that should be really the critical mission” 

And here is how Mr. Zoellick answered: 

“Your point about the Bank regulators is a particularly intriguing one, and let me share with you a little anecdote. 

Bank regulators come out of the world of central banks, and central banks will be the last bastion to fall in openness and transparency. When Pascal Lamy, who is head of the WTO, who has dealt with civil society groups for many years, as I did, starting in the trade area--and I met with Mario Draghi at that time, head of the Financial Stability Board--we shared with him a story that some union groups had come to Basel and tried to get in the door and talk to people, and they were met with screams of uncertainty. And we have suggested--and I'll just pass this along--that they also have to build some outreach mechanism through the Financial Stability Board and openness and transparency. And I will just share this from my own learned experience. Some institutions--central banks in particular because of the sensitive market information--build in cultures of this, and it is understandable, but then, on the policy level, as you suggest, people need to get used to being more open about it. And I just think that that is something, again, that we can try to work with you with as a general principle. I think the world will move more in this direction, but it will take some time on it. 

And I agree with Christine's response to you about the fact that the good news is, as the discussion in Britain showed, that people are starting to debate the exact purpose of banks.” 

You can find the question in the video, minute 48:40, with Mme Lagarde´s answer minute 55:20 and Mr. Zoellick´s on 1.04:15. http://www.imf.org/external/am/2011/mmedia/view.aspx?vid=1176766541001

From both answers you can deduct what I have always and most loudly criticized about the Basel Committee, namely that they have regulated the banks without defining or even considering what is the purpose of the entities they regulate… How on earth can you regulate something well without defining its purpose?

Wednesday, September 21, 2011

The Basel Committee watchdog, is now to probe how banks measure assets? You´ve got to be kidding!

The following is from a statement of Stefan Walter, secretary general of the Basel Committee on Banking Supervision, on September 20 

"If risk-weighted assets are not calculated in the correct way then the integrity of the (capital rules) is compromised" …. “The Basel Committee of international banking regulators is to launch a study into how banks measure assets for meeting capital safety rules… will focus on how banks determine risk-weighted assets under existing rules, not on whether the regime itself should change.” 

It looks like the Basel Committee is beginning to understand the horrible dimension of its mistakes, but, what an amazing lack of fortitude! …now it wants to blame the banks… without referencing its own madness when determining the risk-weights of Basel II and how these are used. 

Basel Committee Members, You tell us! You who determined that capital requirements for banks when lending to a triple-A rated sovereign should be zero, and to sovereigns like Greece only 1.6 percent; you who assigned a risk-weight of only 20 percent for anything private sector related to a triple-A rating and therefore allowed the banks to have only 1.6 percent in capital and leverage up 62.5 to 1 when investing in securities collateralized with lousy awarded mortgages to the subprime sector …. How do you think banks should determine risk-weighted assets under existing rules? 

You should not need a study for that… just ask yourselves! For heaven´s sake, you ARE the regulators!

Saturday, September 17, 2011

“That used to be us” misses completely that us used to be risk-takers.

Thomas L. Friedman and Michael Mandelbaum recently authored the book “That used to be us: How America Fell Behind in the World It Invented and How We Can Come Back” 

From the comments I have heard, I have not read the book yet, the authors, like most other thinkers, fail to understand the most fundamental cause the US, as well as the Western World, is falling behind, namely a growing risk-adverseness, and which is represented most clearly in the current bank regulations. 

Even though banks already take consideration of the risks of default they perceive when they set their risk-adjusted interest rates, and amounts the lend, the regulators ordered the banks to have higher capital when lending to those perceived as “risky” than when lending to those perceived as “not-risky”. 

Suffices to say, that translates into a subsidy to bank lending to those already favored by the market, like “good” sovereigns and the triple-A rated, and into a tax on bank lending to those already disfavored by the market, like the small businesses and entrepreneurs. 

Those regulations are inexplicable since whatever is perceived as “risky” does not carry in it the potential to cause a systemic crisis, only what is perceived as “not risky” can. 

Those regulations have been designed without a single word being stated about what the purpose of our banks should be, and much less with respect to how much risk they should take to fulfill their vital capital allocation role. 

One of the reasons the truth has not come out, is because the world has been caught into a linguistic trap. Most experts attribute the crisis to excessive risk-taking, but which considering that all the significant losses originated in what was ex-ante perceived as “not-risky”, must clearly be wrong. 

The US, and the Western Word, became what they are because of risk-taking, and without it the US, and the Western World, will stall and fall. 

With respect to this odious wall of regulatory discrimination against risk-taking, that needs to disappear if we are going to have a chance to Come Back, we can only shout out: “Mr. Regulator. Tear down that wall” 

PS. Here´s a short video that explains the current regulatory madness it in an apolitical red and blue! http://bit.ly/mQIHoi

Wednesday, September 14, 2011

The lending to Solyndra LLC conundrum

If banks lend to Solyndra LLC, directly, that solar panel maker which after given a $535 million federal loan guarantee recently filed bankruptcy, they need to hold 8 percent in capital, but, if they lend to the US government so that it can relend those funds to Solyndra LLC, the banks need no capital at all… Is this really the way you want it to be? 

Mr. Regulator. Tear down this Basel wall! 

PS. A video explaining current regulatory madness it in an apolitical red and blue! http://bit.ly/mQIHoi

Monday, September 12, 2011

Basel bank regulations are un-American, un-European and un-Western World

I do indeed think that current regulations are un-American, but I guess my reasons are not exactly those of Jamie Dimon.

Yes! It is un-American, because by allowing banks to leverage more their capital when earning the risk-adjusted-interest-rate from those perceived as “not-risky” than when earning the same rate from those perceived as “risky”, Basel regulations have introduced a silly and unproductive risk-adverseness that is not compatible with a “ the land of the brave”

Yes! It is un-American, because allowing banks to leverage immensely more their capital when lending to the government than when lending to their small businesses and entrepreneurs, is stealth communism, absolutely not compatible with “the home of the brave”

Yes! It is becoming even more un-American, because allowing some banks to be named Systemically Important Financial Institutions, SIFIs, against a token additional 2.5 percent equity paid over many years, and thereby awarding them a “Too-big-to-fail” franchise, and relegating de facto all other banks to the group of Systemically Un-Important Institutions, SUFIs, is, or should be, an un-American discrimination

PS. Here´s a video that explains a small part of the craziness of our bank regulations, in an apolitical red and blue! http://bit.ly/mQIHoi

Sunday, September 11, 2011

Bank regulations and 9-11

It might be because I am a bit too risk-adverse that I have always felt that as long as the Western World remains brave, and willing to take risks, it will survive any threat, no matter how big these are, but, if it becomes coward and risk-adverse, then any minor cold could signify its demise. In this respect, with anguish, I must alert about the damages that the regulators are doing to our banks, the frontline financiers of our risk-takers. 

The banks have always discriminated based on what they perceive as the risk of default, which of course includes the information provided by the credit ratings. That they do by means of: the higher interest rates charged, the lower amounts lent, the shorter length of the loans, more collaterals required, the longer time allotted to investigate the credit worthiness of the borrowers, and of course the bankers´ own personal risk-adverseness... never heard about the banker lending the umbrella when the sun shines and taking it back when it rains? 

Therefore, when the bank regulators, the Basel Committee for Banking Supervision and friends, imposed capital requirements for banks based on the perceived risks of default, which allowed for much lower bank capital when the perceived risk of default was low as to what was required when the perceived risks were high, the regulators added a new, very arbitrary and dangerous, layer of risk adverseness. 

Those capital requirements discrimination signified that the risk-adjusted premiums for lending to what was perceived as not risky could be leveraged on bank capital much more that what the risk-adjusted premiums for lending to those perceived as risky could be. 

The immediate result was to generate a stampede of bank lending to the “not-risky”, like “approved” sovereigns and risk-free AAAs, which created the current crisis … and to provoke a withdrawal from lending to the “risky”, like the job creating small businesses and entrepreneurs, which keeps us from getting out of our current crisis. 

The saddest part of it all is that, more than three years into the crisis, the problem here mentioned is not even discussed and much less a part of the reforms of our bank regulations. Basel III still has the bank regulators acting as risk-adverse global risk managers…in other words diggings us deeper in the hole. 

In these days when we are remembering the horrors of 9-11, we need then to be aware that the bank regulators, unwittingly, are engaging in regulatory terrorism that will weaken the Western World much more than other better known forms of terrorism. 

Risk-taking is the oxygen of any development and movement forward… and, if you don’t move forward you fall…and so what’s it going to be Western World?


Ps. A video that explains a small part of the craziness of our bank regulation in an apolitical red and blue! http://bit.ly/mQIHoi

Sunday, August 21, 2011

"No ordinary man could be such a fool"

My daughter Alexandra, an art fanatic, on hearing my explanation about the mistake of the Basel Committee, pointed me to “The forger’s spell”, a book by Edward Dolnick about the falsification of Vermeer paintings. Boy was she right! 

In that book Dolnick makes a reference to having heard Francis Fukuyama in a TV program saying that Daniel Moynihan opined “There are some mistakes it takes a Ph.D. to make”. And he also speculates, in the footnotes, that perhaps Fukuyama had in mind George Orwell’s comment, in “Notes on Nationalism”, that “one has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.” 

And that comprises about the most appropriate explanation I have yet seen so as to understand why our bank regulators were able to commit their huge mistake that got us into this financial and economic crisis that threatens the Western World, namely to base their risk weighted capital requirements on the expected and not on the unexpected.

No “ordinary man” would have told his children to beware about what he knew his children were afraid of, and stimulated them to go more where they already wanted to go as it seemed safe to them… which is precisely what the current risk weighted capital requirements for banks do. They cause too large bank exposures whenever the perceived risk of default of the borrower is low, and too small or even nonexistent exposures whenever the perceived risk of default is high. 

And then, just like to force it down our throats, Dolnick writes “Experts have little choice but to put enormous faith in their own opinions. Inevitably, that opens the way to error, sometimes to spectacular error.

Dolnick also mentions that the psychologist Leon Festinger once marveled: “A man with conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point”. 

All of which also leaves me with the problem that seemingly no ordinary financial reporters, like those in FT, can really come to grips with believing, or even daring to believe, that experts could be such fools.



PS. No matter how insightful Francis Fukuyama seems to be, with his "End of History", he shows he did not see the statism introduced in the Western world in 1988 by bank regulators, with their Basel Accord

PS. Alexandra Kurowski 2016, M.A. in Modern and Contemporary Art and the Market, Christie’s Education New York,


Saturday, July 16, 2011

I bet you’d all be better bank regulators than those in the scandaliciously dumb Basel Committee!

Of course we would all like and benefit from the credit ratings providing us with more accurate results… but that is not really the issue.

If you were a responsible regulator, what would make you toss and turn at night, that the credit ratings are correct or the possibility they are wrong?

If your answer, as expected, is the second, then try to explain the current capital requirements for banks that allow for extremely little bank equity when the credit ratings determine there is very little or no default risk at all, and which therefore are betting it all on the credit rating always providing correct risk information. Loony eh!

As a result of this regulatory silliness, the current crisis left our banks with no capital, simply because they were not required to have any capital against what was ex-ante rated as “not-risky” but that “ex-post” could turn out to be very risky.

Would you have not been a better regulator asking instead for capital requirements for banks that covered the case of the credit ratings being wrong? I bet you would!

One of the biggest challenges we now face is finding a way to accept and internalize that the “expert” regulators appointed to such vital places as the Basel Committee for Banking Supervision, the global bank regulator, could really come up with so unbelievably unbelievable dumb regulations… Truly scandalicious!

PS. Loony bank regulations explained in an apolitical red and blue!

Thursday, July 14, 2011

Did the Basel Committee outsource the drafting of Basel I-II-III to Fidel Castro in Cuba?

Something like that must have happened because regulations that order banks to hold much much more capital when lending to small businesses and entrepreneurs, than when lending to the government, can only be described in terms of a communistic ruled access to bank credit.

SEE THE VIDEO. Loony bank regulations explained in an apolitical red and blue! http://bit.ly/mQIHoi

Wednesday, July 13, 2011

The vicious communistic styled bank-regulatory circle that nationalized our bank savings

“I, the Government, commit to give the credit rating agencies strong evidences that I will support you, the big banks, so that you, the big banks, can get good ratings and raise funds cheaply. 

And I, the Regulator, commit to set zero or very low risk-weights so that you, the banks, do not need to hold capital when lending to the government… of course for as long as you allow us to keep our jobs. 

And you, the big banks, you just do as the incentives and the disincentives tell you to do. 

And so we, the Government, the big banks and the regulators will live forever happy… until the scheme collapses and citizens and taxpayers find out what we have been up to.”

Sunday, July 3, 2011

Who on earth authorized the Basel Committee to do more than regulate or supervise banks?

The Basel Committee for Banking Supervision, whose recommendations the USA has committed to follow, has decided that when a bank lends to the government it requires zero capital but that when it lends to a small businesses or entrepreneur, it needs 8 percent of generously defined bank capital (Basel II), or 7 percent of more strictly defined bank capital (Basel III).

In doing so the Basel Committee is doing much more than regulating and supervising banks, it is de-facto introducing a monstrous, almost communistic, pro-government bias into the world’s financial system, as well as an unexplained risk-adverseness that could easily jeopardize the creation of the next generation of decent jobs. 

Besides it is utterly stupid because never ever has a bank crisis originated because of excessive lending to those who like small businesses or entrepreneurs are perceived as more risky, and therefore already pay higher interest rates, which goes into the capital accounts of the banks.

Who on earth authorized the Basel Committee to do what they do and which, by the way, sounds so un-American?

Saturday, July 2, 2011

All systemic unimportant and irrelevant financial institutions need to fight back... or they’re toast!

These days some lucky banks, by paying with a little of capital increase spread out over many years, will be denominated by the Basel Committee as Globally Systemic Important Financial Institutions G-SIFIs. 

At that moment all other banks become de-facto Globally Systemic Unimportant Financial Institutions, in other words almost declared as irrelevant. 

If the G-SUFI’s do not fight back or protest they’re toast! Our dear George Bailey would not have stood a chance against a Basel Committee. Did we really authorize the bank regulators to do that?

Crazy bank regulations explained in apolitical red and blue!

Friday, July 1, 2011

A letter from a citizen to Mme Christine Lagarde

Dear Mme Christine Lagarde.

I wish you all the best of luck as the new Managing Director of the International Monetary Fund… albeit that luck I wish not only for yourself, but also because at this moment it really behooves us all that you’ll have lots of it.

But, just as another of the most humble stakeholders in the IMF, an ordinary citizen, and since IMF has a fundamental role in leveraging knowledge and ideas with respect to the world’s financial system, I would beg you to consider the following that I feel is crucial for yours and our chances of success.

Currently the “capital requirements for banks” are set by discriminating borrowers based on their “perceived risk of default”, mostly as perceived by the credit rating agencies. More perceived risk, more capital, and vice-versa.

But, this is not logical, given the fact that what regulators need not to concern themselves much with the risks that are perceived, but should concern themselves mostly with the risks that are not perceived.

And, it is also not logical, given the fact that there has never ever been a financial crisis resulting from excessive lending to what is perceived as “risky”, since, except for cases when fraudulent behavior has been present, they have all resulted from excessive lending to what is perceived as “not-risky”. Just look at the current crisis, 100% caused by leveraging the perceived as "not-risky" and then discovering these, later, as being very-risky!

And, it is also not logical, given that those perceived as “risky” are already compensating the capital accounts of the banks by means of paying higher risk-adjusted interest rates.

And, it is also not logical, given that it imposes on those deemed as “risky”, like the small business and entrepreneurs, the need to pay additional interest margins to banks, which I currently calculate in the order of 270bp, just to compensate for the regulatory advantages given to those who are perceived as “not-risky”, the triple-A rated.

And, it is also not logical, given that those deemed as “risky”, like the small business and entrepreneurs, with little or no access to capital markets, are often those whose credit needs we most expect our banks to serve.

Mme Lagarde, if you absolutely think bank regulators must interfere by defining capital requirement for banks in ways that discriminate among borrowers, then… why not have the regulators discriminate the capital requirements for banks based on the potential of the different borrowers to generate the next generation of decent jobs?

Again, wishing you (and us) the best of luck

Yours sincerely,

Per Kurowski
A former Executive Director at the World Bank (2002-2004)

Our crazy bank regulations explained in red and blue

Thursday, June 16, 2011

And what about Systemically Un-Important Financial Institutions?

Anyone thinking about how to reign or prepare for what could happen with Systemically Important Financial Institutions, should put on your hats of bankers of Systemically Un-Important Financial Institutions, and think about what you need in order to be able to compete so as to survive, as an independent and not as a satellite.

For instance Daniel K. Tarullo has not yet done so, and though he is probably not aware of it he is on that dangerous route that leads to awarding some behemoths a “Too-big-to fail” franchise.

Monday, June 13, 2011

Do not even think of selling “Too-big-to-fail” franchises, much less for a meager 3 percent of additional bank equity.

It would seem like some regulators want to sell “Too-big-to-fail” franchises to Systemically Important Financial Institutions (SIFIs/G-SIFIs), and even for a mere 3 percent in additional capital. Do not even think of it! 

Not only will 3 percent of additional bank capital end up being almost meaningless in the case of a systemic explosion or implosion of these huge banks, but it is also probable that precisely those Too-big-to-fail banks that we least should want to be too big to fail, will be those most likely to exploit the franchise for all it is worth, in order to compensate the additional equity required, in the ways we would least like to see these franchises exploited. 

Of course regulators will argue these franchises will be the subject of special supervision. Who are they fooling? Is it not hard enough for them to supervise these behemoths without labeling them as the most likely candidates for special support?

Tuesday, May 31, 2011

What would Le Vieux Lion Winston Churchill had said about the bank regulators in the Basel Committee?

These regulators bribe the banks by means of ultra-low capital requirements to go where their official risk perceivers, the credit rating agencies, perceive the risks of default to be low, and to avoid like a plague servicing the needs of the risk-taking small businesses and entrepreneurs upon whom Europe´s greatness and future jobs depends?

You wimps!?

Wednesday, May 25, 2011

Per Kurowski’s quiz for the candidates to Managing Director of the IMF


Q1. Which type of bank clients can generate such a massive exposure so as to trigger a systemic bank crisis?

a. Those perceived as risky (small businesses and entrepreneurs)
b. Those perceived as not risky (triple-A rated)

Q2. The needs of which clients do we most expect our banks to attend to?

a. Those perceived as risky with no access to capital markets (small businesses and entrepreneurs)
b. Those perceived as not risky and with access to capital markets (triple-A rated)

Q3. The Basel Committee allows for much lower capital requirements for banks (five times less) when lending to those perceived as not risky (triple-A rated). Based on your previous answers, which would be your most likely opinion?

a. I fully agree with the Basel Committee
b. The Basel Committee might have got it all completely upside down.

Note: The responses of “b, a, and b” would qualify the candidate to proceed to further tests.

TWO EXAMS

The bank regulator’s exam

1. Which type of bank clients can create such a massive exposure so as to generate a systemic bank crisis?

a. Those perceived as risky (small businesses and entrepreneurs)
b. Those perceived as not risky (triple-A rated)

2. The needs of which clients do we most expect our banks to attend to?

a. Those perceived as risky with no access to capital markets (small businesses and entrepreneurs)
b. Those perceived as not risky and with access to capital markets (triple-A rated)

The bank regulators, represented by those in the Basel Committee answered (a) to the first question, and totally ignored the second. As a consequence they imposed higher capital requirements on banks when lending to client “officially” perceived as riskier, and vice versa.

Our exam

1. How did the bank regulators do?

a. They failed miserably
b. They excelled!

2. If your answer is (a) but we are yet leaving our regulations in the hands of exactly the same regulators what does that say about us?

a. We’re stupid
b. We’re smart