August 24, 2016

Much of those interest margins banks now obtain financing what’s perceived safe, used to belong to pension funds.

Sir, I refer to Mary Childs and John Authers’ “Canada quietly treads radical path on pensions: Retirement funds are pushing beyond bonds and stocks in search of better returns” August 23.

Please hear me out. Before the introduction of the risk weighted capital requirements, banks spread out their credits to those who offered them the best risk-adjusted margins, while subjecting the size of the exposures to the same perceived credit risk. Taking risks, with reasoned audacity, was the business of the banks. In comparison, avoiding risks, and looking for certain minimum returns, was the business of pension funds.

But, with the risk weighted capital requirements that allow banks to leverage much more their equity with what is perceived as safe than with what is perceived as risky, banks began maximizing their returns on equity by minimizing the equity they needed to hold, something which meant going for what was perceived, decreed or concocted as safe.

As a result the bankers were able to realize their wet dreams of huge perceived risk adjusted returns on equity for playing it safe.

But that de facto meant that banks occupied the investment space pension funds use to occupy, and so now we have that pension funds have to go out there and take the risks banks used to take.

Sir, you can be damn sure that if banks needed to hold the same capital against all assets they would not be swamping the safe havens, and pension funds would not have to be “facing the challenge of [so] low returns on traditional assets”

This is all so foolish. Why can’t we allow banks to be banks and pension funds to be pension funds?

This is all so dangerous. If banks do not finance risky SMEs and entrepreneurs the real economy will stall and fall, and then even the safest will not buy retirement tranquility (or jobs for our children and grandchildren).

August 23, 2016

BoE, if you really believe jobs come first, why not capital requirements for banks based on job creation ratings?

Sir, I refer to John Authers and Robin Wigglesworth “Big Read: Pensions: Low yields, high stress” August 23.

There we read that Baroness Altmann, the former UK pensions minister, said this month “The emergency to pension schemes has been caused by Bank of England’s quantitative easing policy of buying bonds…I don’t see how it is reasonable to ask companies with pension schemes to fill a £1tn hole and put money into their businesses as well. It doesn’t add up.”

BoE officials say they recognize the problem, but Andrew Haldane, its chief economist, says the central bank’s top priority must be to stimulate the economy. “I sympathize with savers, but jobs must come first”.

I don’t think so, from what BoE and their colleagues are doing, it seems much other, like keeping the values of assets high and borrowing costs for the government low comes first.

Sir, again, for the umpteenth time, the Basel Committee, the Financial Stability Board and other frightened risk adverse bank nannies, have 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; 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 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 since 1997.

@PerKurowski ©

August 22, 2016

Ms Merkel, Mr Renzi and Mr Hollande. Do you want to tackle growth and youth issues? Read the memo or give me a call.

Sir, Arthur Beesley, Anne-Sylvaine Chassany in Paris and Stefan Wagstyl report on that the leaders of Germany, France and Italy will attempt to forge a common plan to bolster Europe’s economy; and that Sandro Gozi, Italian secretary of state for European affairs said: “Europe needs an immediate answer on growth, youth and security issues”, “European leaders seek to bolster economy” August 22.

Part of that is because the result of that a the €315bn investment plan introduced last year by Jean-Claude Juncker, European Commission designed to tackle youth unemployment, during its first year, fell well short of expectations.

Here is what I would suggest they should do. They should ask their bank regulators whether when they regulated they gave any attention to the need that banks cooperate promoting sustainable growth and employment for the youth?

The answer they should receive, if the regulators were honest, would be: “Not one iota… all we cared about was for banks to avoid the risks we all perceive ex ante!”.

At that moment Ms Merkel Mr Renzi and Mr Hollande should begin to get an intuition that something is not smelling right.

In short, the current risk weighted capital requirements have banks avoiding the financing of the riskier future, and just keeping to the financing of the safer past, and that’s not the way for our economy to move forward, in order to not stall and fall.

Of course, if they want further explanation on how inept the current bank regulators are, they could read the following aide memoire, or they could give me a call.

@PerKurowski ©

To restore growth and wealth generation we must get rid of dumb regulatory risk aversion.

Sir, Michael Heise writes: “Greater innovation and higher productivity remain the safest routes to restored growth and wealth generation. And this needs open markets, tax incentives for investment and a well-qualified workforce — not ever more fiscal spending and central bank cash injections.” "Monetary policy lacks the muscle to boost growth" August 22.

Absolutely, but a prerequisite for that to be achieved is getting rid of that toxic risk aversion present in the risk weighted capital requirements for banks and that are distorting the allocation of credit to the real economy.


@PerKurowski ©

High interests do not solve any retirement problems, if there is no real economic growth to pay for these

Sir, Jonathan Ford writes of how “The Bank of England’s decision to cut interest rates and resume quantitative easing” is creating all sort of expected deficits in retirement plans, and specifically to “UK’s 6,000 still existing defined benefits schemes” “Real change in attitude is needed to solve the issue of fund deficits” August 22.

Ford also mentions the responsibility of the “existing generation…to strive to provide for the obligations to workers they have inherited”. That is very correct, but the possibilities of it will also very much depend on the health of the real economy.

If there were no low or even negatives interest rates, but only high positive interest rates, in order for these to translate into real positive rates, the interests would, in the medium and long term anyhow, have to be paid by real economic gains.

And that is why, once again, I insist that the most egregious thing that is happening to that future economy on which we all will depend, is the risk aversion that has been introduced into the allocation of bank credit by means of the risk weighted capital requirements for banks.

It is just amazing this is not even being discussed.

@PerKurowski ©

August 19, 2016

Even sophisticated up-in-the-fronters can fall victims to populists, like those dressed up as bank regulators.

Sir, John Lloyd correctly writes that “rising inequality, wage stagnation and workplace insecurity merge with concern about fragmenting communities, exacerbated by fear of unregulated immigration and terrorism…produces a popular energy” that can be captured by populists. “For left-behinders, populists paint a picture of a better future” August 17.

But not only left-behinders can be victims of cheap populism, those up-in-the-front too, and populism can come in all shapes of form, including camouflaged as bank regulations.

Like that populism imbedded in: “If banks avoid risks, this will keep them from failing, and we will all prosper. So more risk more capital - less risk less capital”

And what is amazing is to see the how many famed journalists, Nobel Prize winners, academicians and politicians, fell for it, ignoring that what is risky is already made safer by being perceived as risky, but made even riskier if perceived as safe.

And what is even more amazing is how, even after a crisis brought on by excessive bank exposures against too little capital to what was perceived as safe; and an economy that is stagnating and not showing increased productivity, they still can’t open their eyes to the distortions in the allocation of bank credit to the real economy caused by that grievous piece of bank regulation.

Or is it like John Kenneth Galbraith said: “If one is pretending to knowledge one does not have, one cannot ask for explanations to support possible objections.” “Money: Whence it came where it went” 1975.

@PerKurowski ©

In Venezuela there’s much human suffering because of lack of food and medicines; but petrol is 1 US$ CENT PER LITER!

Sir, I refer to your editorial "Venezuela’s problems can no longer be ignored" August 19.

Of course as a Venezuelan I pray for my country to get out of that tragic black hole into which crooks or naïve fools has submerged it controlling 97% of its export revenues. 

When we get out of it, which we will, we must see to never to fall into it again. And what we must do for that is to share out all oil revenues directly among the citizens, so to have our governments operate solely with the tax revenues provided by We the People.

But for the rest of the world, there also are important lessons to be learned. One is that stupid and irresponsible economic policies can cause just as much violation to human rights than any of those other sources usually identified. And when those economic crimes are especially grievous, those responsible for them should be prosecuted in international courts.

For instance, right now when there is huge human suffering in Venezuela, because of the lack of food and medicines; petrol (gas), even after it was raised a mindboggling 6.000 percent in February this year, is still being sold at less than ONE US$ CENT PER LITER - FOUR US$ CENTS PER GALLON.

That petrol should be sold, as a minimum, at its world price as a commodity. And the resulting revenues shared out equally to all, so that its citizens could be better positioned to deal with the de-facto state of emergency that exists; and petrol consumption would go down, and more petrol could be exported, and more food and medicines imported.

@PerKurowski ©

August 18, 2016

Regulators divided private sector in two, Safe and Risky. And guess who is losing out more than usual? All of us!

Sir, Bill Gross asks: “Why would the private sector… not borrow at practically no cost to invest in a centuries’ old capitalistic model proven to reward risk-taking in the real economy?”, “Central bankers are threatening the engine of the economy”, August 18.
 
In his comments Gross forgets there are now two private sectors. One, perceived, decreed or concocted as “safe”, AAArisktocracy and residential housing, and to whom banks can lend against very little capital; and the one which includes those perceived as risky, SMEs and entrepreneurs, those that regulators require the banks to hold much more capital when lending to.

And so “The Safe”, by allowing banks to leverage more their equity, provides the banks with higher expected risk adjusted return than what “The Risky” can do,

And so regulators decreed that money paid in net risk adjusted margins by “The Safe”, is worth more to banks than that same money when paid by “The Risky.

And so The Risky have been left out in the cold, that is unless they accept to compensate banks for this regulatory discrimination; by paying rates over what their ordinary risk adjustments would justify.

QEs and other fiscal stimuli, or negative interests, finds it hard to overcome this hurdle and reach with bank credit the vital SMEs and entrepreneurs, who might want to borrow, and so most of it gets wasted.

And besides The Risky, we all lose out! It refuses the risk-taking tomorrow’s economy requires be taken by todays’; and all for nothing, because The Risky never cause that type of excessive bank exposures that can cause a major crisis; that dishonor belongs entirely to “The Safe”. 

@PerKurowski ©

August 17, 2016

Are you shocked seeing the Financial Times report on banks not doing anything but storing cash, and want to help?

Sir, I refer to your front-page “Big bills: Plans to hoard banknotes pose tricky problem over storage”; and Claire Jones’ and James Shotter’s “Note of caution as Europe’s banks seek to stockpile cash” August 17.

It is shocking; we all know that is not how it should be. That is money not earning what it needs to accumulate in order to pay pensions for the older of tomorrow. That is money not invested in creating the jobs of tomorrow for the young.

Just like John A Shedd said: “A ship in harbor is safe, but that is not what ships are for.”, “Money held by banks in their safes is safe (sort of) but that is not what banks are for”

Do you want to help change that? Then please support the discussion of the following:

Until banks have 8 percent in capital against absolutely all assets, including cash and including loans to infallible sovereigns, the banks should not be allowed to repurchase their own shares, or to pay out more than 20% of their net after tax profits in dividends.

With that I guarantee you some real action in banks lending to the real economy; and that could lead to real economic recovery, real possibilities to build up pension funds, and real jobs for our children and grandchildren.

Forget about QEs, fiscal stimulus and negative interest rates; and let “risky” SMEs and entrepreneurs get the credits to have a go at it.

@PerKurowski ©

August 16, 2016

Little is as imprudent as the risk-adverse risk weighted capital requirements for banks.

Sir, Amar Bhidé writes: “Sweden’s Handelsbanken is an exemplar of prudence… The target loan loss ratio is zero; low loan losses, in turn, allow the bank to offer competitively priced loans and personalised service to creditworthy customers.” “Easy money is a dangerous cure for a debt hangover” August 17.

That is NOT exemplary prudence. “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, which includes too many risky SMEs and entrepreneurs, those that could help provide the proteins the economy needs to move forward, in order not to stall and fall.

The truth is that in the medium and the long term, the creditworthy are more benefited by the banks taking more risks on the not creditworthy, than by just getting low priced loans.

However Bhidé also qualified it with: “prudent case-by-case lending also undermines the stimulative effect of the loose money unleashed by central bankers [because] Experienced financiers will not lend more to less worthy borrowers simply because of low or negative interest rate policies.”

Yes, indeed, but much more undermining of the stimulative effect of loose money is caused by the risk weighted capital requirements for banks… those which require Handelsbanken to hold more equity when lending to someone perceived risky, than when lending to someone perceived safe. Those that result in Handelsbanken 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. Those that cause “small and medium-sized businesses have been left behind”.

Bhidé opines: “What the Fed and other central bankers can — and should — be held responsible for is prudent lending by banks”

Absolutely, I totally agree! But “prudent lending” means guaranteeing the economy sufficient risk taking by the banks; and knowing that, contrary to what current regulators believe, major bank crises are never caused by excessive exposures to something perceived risky, these are always caused by excessive exposures to something perceived as safe when placed on their balance sheets.

Sir, Handelsbanken is a Swedish bank, somehow it seems to have completely forgotten that in Swedish churches we all sang “God make us daring!

PS. Bhidé writes that central bankers “base their assessment of risks, and of what would have happened without their intervention, on models whose mathematical sophistication hides a primitive representation of finance and the economy.” 

That is correct. In October 2004, as an Executive Director of the World Bank, I formally warned: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.” Sir, how many spoke out that clear at that time?

@PerKurowski ©

There’s a distortion of the allocation of bank credit to the economy that does not want to be named, but must be named.

Sir, Mohamed El-Erian writes: “BoE had already gone beyond consensus expectations… by skillfully combining four elements — an interest-rate cut, a reinvigorated and broadened asset purchase program (QE), a special funding scheme for banks, and effective communication” ,“Bank of England bond-buying needs a fiscal helping hand” August 16.

How sad BoE is not skillful enough to understand that a regulatory distortion of the allocation of bank credit to the real economy is blocking the chances to achieve stronger and more sustainable economic growth.

What distortion do I refer to? The risk weighted capital requirements for banks of course. That which allows banks to leverage equity more with assets perceived as safe than with assets perceived as risky; and thereby that which results in banks earning higher expected risk-adjusted returns on equity on assets perceived as safe, than on assets perceived as risky.

As a result too much of BoE’s, and other central banks, and fiscal stimulus, gets to be wasted; by mostly flowing to increase the value of existing assets (stagflation profiteering) and by that way hindering the opportunities of “risky” SMEs and entrepreneurs to gain access to bank credit.

What would happen to UK government borrowings if the sovereign UK, now assigned a zero percent risk weight, had to carry the same risk weight as We the People, 100 percent? To top it up there are many other statist pro-government funding subsidies.

Sir, we have to find a smart way to urgently work our banks out of these regulations, something made difficult by the fact our current bank regulators simply do not know what they are doing. Ask them and you’ll see.

Finally, for someone from a country suffering murdering inflation, Venezuela, it is a real shocker having to read highlighted in FT: “Owning a printing press, the BoE faces no funding constraint”

@PerKurowski ©

August 15, 2016

To generate societal and economic resilience, risks need to be intelligently faced and not just brutishly avoided.

Daniela Schwarzer opines: “Democratic leaders have to join the battle of ideas and be audible in defending their ideals. They need to fight nondemocratic, antiliberal and extremist propaganda proactively and show vision and the capacity to recast in adverse circumstances”, “Resilience is important for societies as well as individuals” August 15.

But real leaders are also open to that dangers can come in all shape and forms, and among the most dangerous, is any kind of populist groupthink generated within mutual admiration clubs, like that of the Basel Committee for Banking Supervision and associated regulators.

The regulators, too fearful of banks failing, imposed risk weighted capital requirements. These resulted in that banks earn higher expected risk-adjusted returns on equity when investing in something perceived ex ante as safe than when investing in something “risky”, like loans to SMEs and entrepreneurs. And that distortion of the allocation of bank credit to the real economy did not only cause the 2007-08 bank crisis, but has also decreased the resilience of the economy…“the capacity to recover quickly from disaster.”

And so “democratic leaders”, and the elite in general, must also fight bank regulations that deny the economy what it most needs to stay vibrant, namely lots and lots of prudent risk-taking, prudent meaning risk in not too big doses.

And in doing so they would hopefully also fight against that statism that has been smuggled in through regulations by non-elected technocrats, that which is represented by a 0% risk-weight for the Sovereign and one of 100% for We the People. 

@PerKurowski ©

August 13, 2016

If one incorrectly accuses bank regulators of being totally inept, in public, one would think they would answer

Sir, Eric Lonergan writes: “Mark Carney is right: the traditional use of interest rates has run its course. For central banks to continue playing a role in preventing recession and raising growth, they will need to rethink the entire premise of monetary policy and aim their firepower directly at consumer spending and corporate investment”, “Interest rates are a spent economic force” August 13.

What central banks, and regulators, must really rethink is the whole bank regulatory framework’s pillar; the risk weighted capital requirements for banks. The problem is they are doing their utmost to avoid that Pandora box to be opened, because they know that would disclose their incredible technocratic-besserwisser disabilities.

Sir, you know what I think of these regulations, and you might think I am obsessed with the issue, which I am… but have you never asked yourself why my arguments are not even discussed? I have publicly accused Mark Carney, Mario Draghi, Stefan Ingves and many other of being absolutely inept bank regulators… and, if I was wrong, one could reasonably assume they would love to strongly correct me… in public.

PS. Sir, as you might be fed up receiving my many letters, you could also ask the regulators to answer my questions, and then you might get rid of me for good. Do you dare!

@PerKurowski ©

The regulators distrust of bankers is condemning our economies to stagnation

Sir, Tim Harford writes: Steve Knack, an economist at the World Bank with a long-standing interest in trust, once told me that if one takes a broad enough view of trust, “it would explain basically all the difference between the per capita income of the United States and Somalia”. In other words, without trust – and its vital complement, trustworthiness – there is no prospect of economic development.”, “The meaning of trust in the age of Airbnb” August 13.

And that would also mean that distrust must equally be dangerous for the development; like when regulators distrusted bankers to adjust for the risks they perceived by means of the size of exposure and interest rates, and told them to also adjust, for that same perceived risk, in the capital account.

And because any risk, even if perfectly perceived, causes the wrong action if excessively considered, our economies are suffering from an inefficient allocation of bank credit. Much too much credit for the safe havens that risk becoming dangerously overpopulated, and much too little for the exploration of the riskier bays populated by SMEs and entrepreneurs. This mother of distrusts, is a real tragedy!

@PerKurowski ©

Do you think Trump wants to lose big? To risk hearing “You’re fired!”? What if he first negotiates with GOP and then quits?

Sir, I refer to Philip Delves Broughton’s article on the candidature of Donald Trump, “The nominee whose tactics make history irrelevant” August 13.

It is incomplete because, there more than 80 days until November 8, a very long time in these times when things can turn around in seconds, and it does presuppose that Trump would be willing to accept a very significant loss, having to hear “You’re fired!”, without considering the possibility he negotiates with the GOP, and quits, and thereby quite possibly allow an alternative republican candidate to win the elections. He is a businessman after all... or not?

And what of the Democrat party if Clinton loses? Would not Obama for instance then hold on to much more influence in it? Will Michelle run someday? Sir, you see there are plenty of questions in the air. 

@PerKurowski ©

August 12, 2016

Only by getting rid of all regulatory subsidies to negative rate yielding debt, would we have free-market real rates

Sir, I refer to Gillian Tett’s discussion of “The bizarre world of negative rates”, August 12. As Ms. Tett does not refer to the obvious distortions in the allocation of credit to the real economy risk weighted capital requirements for banks and other regulations cause, I can only assume she is following some standing instruction of not to do so.

Because she must know that, if a bank wanted to “move funds from low-yielding assets, such as [sovereign or highly rated private] bonds or cash, into more productive investments that could produce better returns and growth”, then it is required to hold more of that equity that expects high returns, or then it can pay out less dividends... or bonuses.

And it will get even worse, since statism imposed via regulations is rampant. Only yesterday Robin Wigglesworth in Short View wrote: “New rules slapped on the US money market fund industry… are set to come fully into effect in October. The changes have spurred a gradual investor exodus from the funds, and the conversion of ‘prime’ MMFs which invest into corporate debt into ones that invest only in Treasuries (which are less affected by the new regulations).”

@PerKurowski ©

Statism, by way of bank regulations, marches on! Thou shall not hold anything but the Infallible Sovereign’s debt

Sir, Robin Wigglesworth in Short View August 11 writes: “New rules slapped on the US money market fund industry… are set to come fully into effect in October. The changes have spurred a gradual investor exodus from the funds, and the conversion of ‘prime’ MMFs which invest into corporate debt into ones that invest only in Treasuries (which are less affected by the new regulations).”

So clearly those statists that furthered their agenda by way of bank regulations, like in 1988 when the Basel Accord decreed a risk weight of zero percent for the government and 100% for We the People, keep marching on unabated.

And since Wigglesworth also refers to the Libor “Lie-bor” rate manipulation, let me also remind you that no private sector manipulation ever, has produced even a fraction of the costs for the society at large, as has the Basel Committee's outrageous manipulation of the allocation of bank credit to the real economy.

@PerKurowski ©

Italy has no chance of solving its bank and economy problems, if it does not understand the regulatory distortions

Sir, Sarah Gordon writes: “Thousands of small and medium-sized companies have gone under, taking with them the bank loans on which they depended, as well as demand for lending”, “The spreading pain of Italy’s bank saga”, August 11.

First let us make on thing very clear, those thousand and SMEs that have gone under more than they were expected to go under, did so as a result of the 2007-08 crisis. They had not one iota to do with causing the crisis.

And so let me explain it again, for the umpteenth time: Before current bank regulations, pre 1988, pre Basel Committee, no one made a distinction between a Lira or an Euro in capital invested in something perceived as safe, or in something perceived as risky.

But then the Basel Committee came along and decided that, if banks invested in something perceived, decreed or concocted as safe, then a unit of their capital (equity) could be leveraged more than 60 to 1, while, if invested in for instance some loans to SMEs and entrepreneurs, that same unit could only be leveraged 12.5 to 1.

And so of course that introduced a very serious distortion of the allocation of bank credit to the real economy, which persists until today, all because our besserwisser bank regulators, insist on that they are besserwissers.

If Italy does not allow its SMEs or entrepreneurs to have fair access to bank credit then it is doomed to stagnation… that is unless La Banca Sommersa comes to its rescue.

@PerKurowski ©

August 10, 2016

Should we not also be concerned with the behaviourism of the Financial Times? I mean FT having such a delicate ego?

Before we need to concern ourselves with the behaviourism and the market, which is quite some nonsense, unless we want to ordain the markets to behave in some special way, we should concerns ourselves with those whose behaviourism could most distort the markets… like the bank regulators.

So, what behaviourism could cause them to regulate banks without defining the purpose of the banks, more than that of being safe mattresses to stash away the cash?

So, what behaviorism could cause them to believe that what bankers perceived as risky was more dangerous than what bankers perceived as safe?

So, what behaviourism could cause them to believe they needed to tilt so much in favor of the public sector so as to assign the sovereign a risk weight of zero percent and to us, We the People, one of 100%?

So, what behaviourism could cause them to believe the world becoming a better place with the banks avoiding taking the risks of lending, like for instance to SMEs and entrepreneurs?


Why do I ask? Because I have sent FT thousands of letters on this issue, and which they have 99.9% ignored, because, though they might say otherwise, they are not without fear nor without favour.

August 08, 2016

If anyone in FT is living up to FT’s motto of “Without fear and without favour” that’s Lucy Kellaway

Sir, again, Lucy Kellaway is bravely shouldering her responsibility to socially sanction nonsense. That kind of sanction is extremely important, effective and much needed. Way to scarce nowadays. “Millennials ought to ignore career advice from BCG boss”, August 8.

How I wish she would help me out to socially sanction the bank regulators who came up with the loony concept of risk-weighing the capital requirements for banks, and, in order to keep the bank system safe, to assign a risk weight of 20% to what is AAA to AA rated and of 150%, 7.5 times larger,  to what is rated below BB-.

All as if the world of the ex ante perceived as highly speculative risky below BB-’s, pose greater dangers for our banks than what is ex ante perceived as prime and absolutely safe.

@PerKurowski ©

“Progressives” can promote fairness and growth by stopping bank regulator’s despicable discrimination against “risky”

Sir, Lawrence Summers writes: “Often in economics there are trade-offs. But not always. We can and must promote both fairness and growth. “The progressive case for championing pro-growth policies” August 8.

And for that he recommends: “more demand for the product of business. This is the core of the case for policy approaches to raising public investment, increasing workers’ purchasing power and promoting competitiveness”

Again Summers seems to ignore completely what one could believe would be a great cause for “progressives”, namely to combat how the last decades those who are perceived as risky, when compared to those perceived as “safe”, have had their access to credit made much more difficult by the risk weighted capital requirements for banks

Who are “the risky”? In terms of growth, the all important SMEs and entrepreneurs, those risk weighted 100% (and more).

Who are “the risky”? In terms of fairness, the weaker, the poorer, the not yet up there, the ones praying for fair opportunities.

So how can we explain that progressives do not give much attention to these regulations that so odiously discriminate in favor of the AAArisktocracy and against "the risky"? Perhaps because these also include the risk-weight of 0% for the government, and most progressives are foremost statist.

Perhaps because it is not in the nature of progressives to understand, and much less admit, that regulators can get it so wrong.

@PerKurowski ©

August 07, 2016

If only regulators had had one of those “what-to-do” algorithms Tim Harford mentions before regulating banks.

Sir, Tim Harford refers to Brian Christian’s and Tom Griffiths’ “Algorithms to Live By” in order to ask: “Can computer scientists –– help us to solve human problems such as having too many things to do, and not enough time in which to do them? He concludes “It’s an appealing idea to any economist”, among others because “Computers practise ‘interrupt coalescing’, or lumping little tasks together. A shopping list helps to prevent unnecessary return trips to the shop.” “An algorithm for getting through your to-do list” August 6.

How I wish the bank regulators had had access to such algorithms and to the lumping together of all their, not that small, but huge necessary tasks.

If so, they would have been remembered to define the purpose of the banks, among which is the need to allocate credit efficiently to the real economy stands out, and so they would have stayed away from their distortive risk weighted capital requirements.

If so, they would have remembered to read some books on past crises, or looked into some empirical data, and thereby have understood that bank crises are never ever caused by excessive exposures to something perceived as risky, but always from excessive exposures to something perceived as very safe when put on the balance sheet, and so they would have know their risk-weighted capital requirements were 180 degrees off target.

@PerKurowski ©

August 06, 2016

Monetary and fiscal policies, even though they live at different addresses, are very much married

Sir, you write “there are a few welcome signs that fiscal rather than monetary policy may finally be taking some of the strain of stimulating a sluggish global economy” and, again, that “With bond yields apparently grinding ever lower in advanced economies, the cost of a debt-financed expansion continues to fall.” "A quiet shift in focus for economic policymakers", August 6.

And one gets the impression you believe monetary and fiscal policies are independent, and live separates lives. That’s really not so, they are much married even if they don’t live at the same address.

They were very much married back in 1988 when regulators (central banks) with Basel I assigned the sovereign a risk weight of 0% while giving us We-The-People one of 100%.

In November 2004, in a letter published by the FT I wrote: “Our bank supervisors in Basel [central banks] 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]?”

And here follows a brief storyline I recently gave you in another of the letters you feel to have the right to ignore, only because they verse repeatedly on the same theme.

Government issues bonds, the public buys these, and central banks, wanting the economy to grow, then buy these from the public by means of QEs

Then the public does not know what to do with that purchasing power given to them by the central banks and, wanting to play it “safe”, looks to buy government bonds, and so the interest rates on public debts goes further down.

And so then you and many others recommend to take advantage of these low borrowing rates, in order for governments to invest in infrastructure. And if government follows their advice, it will issue more bonds, and the public will buy these.

But since the economic punch from infrastructure investments vanishes quite fast if there are no one willing to use and pay the right price for it, the central banks will then (cheered on by FT) launch new rounds of QEs, and buy more government bonds from the public… and on and on it goes… until!

Sir, at what point do negative rates become absolutely incompatible with a 0% risk weight of sovereign debt? How much capital will banks then need to hold against government bonds? How do we get off this not at all merry merry-go-round?

And to top it up, meanwhile, SMEs or entrepreneurs, those who could perhaps best help to get the real economy going, if these want the opportunity to a bank credit, banks are told that “since these clients are risky you need to hold more capital against their borrowings”. And so banks do not lend these clients the money, or, in order to compensate for the higher equity requirements, charge them much higher interest rates, making thereby the “risky” riskier.

How the hell did we land in this hole? I know!

PS. With respect to their future pensions, are central bankers and regulators isolated from their decisions? Should they be?

@PerKurowski ©

We need banks that profit by taking reasoned risks; and that have capital to cover for a good chunk of the unexpected.

Sir, I refer to Dan McCrum’s and Thomas Hale’s “Stagnation saps enthusiasm for Europe’s banks” August 6.

It includes contradictory statements like “the financial architecture appears solid” and “most people accept there is enough capital in the system now. Not just investors, but regulators as well” with that of “a rounding error of just 1 per cent on European asset values would wipe out More than a third of European bank equity, the all-important number determining ability to absorb losses.”

The ex ante perceived risk-weighted capital requirements for banks has introduced total confusion into banking. Not only with respect of these having reasonable equity, but also with respect to their business. Over the last decades, banks have looked to maximize their returns on equity much more by reducing the capital required, than by analyzing gross risk/reward ratios as such. And that must come to an end.

First EBA’s recent stress tested European banks indicated that they were leveraged almost 24 to 1, and that makes them clearly undercapitalized, not so much in terms of the expected, but in terms of the unexpected, which is what bank equity should be there for.

And secondly, we urgently need banks to assume their more traditional role of earning their profits by taking reasoned risks in the real economy… that economy in which a unit of capital is a unit of capital, independently of it being invested in something safe or something risky.

To avoid risks, especially when currency does not carry negative interest rates, a mattress seems to suffice. And for the society (taxpayers) to support banks that make their profits by avoiding taking risks, and not by helping it to build future, is stupid.

Some tweet sized conclusions:

The last decades banks have earned huge returns on equity mostly by minimizing equity, that has to stop.

European banks are severely undercapitalized, not that much in terms of the expected, but in terms of the unexpected.

Banking should be about helping society to take risks, not avoiding these. For that mattresses suffice.

Bankers capable of reasoned audacity are magnificent. Equity reducing bankers, are, at best, absolutely tedious.

Just looking at their dumb risk-weighted capital requirements, bank regulators should be disgraced by society.

@PerKurowski ©

August 05, 2016

Money from heaven can be real or fake and it can be dropped by trusted helicopter pilots or as Universal Basic Income

Sir, Robert Skidelsky writes: Because “there is no assurance that a lot of such helicopter money would not be hoarded…contemporary advocates of helicopter money like Willem Buiter and Adair Turner see it mainly in terms of monetary financing of additional government spending. The government should pay for, say, an investment programme not by issuing debt to the public but by borrowing from the central bank. This will increase the government’s deficit, but not the national debt, since a loan by the central bank to the government is not intended to be repaid. Thus the government acquires an asset but no corresponding liability.” “A tweak to helicopter money will help the economy take off” August 5.

Have these statists gone raving mad? “The government acquires an asset but no corresponding liability?” Is this a Ponzi fiscal revenue scheme?

Have these statists gone raving mad? In this world of cash-strapped citizens would they not know better what to do with their helicopter money than some bureaucrats with other people’s helicopter money?

And besides, helicopter money could be real money and it could be fake money… and only fiscal revenues Ponzi schemers would be thinking of dropping what’s fake.

And besides, helicopter pilots could be trusted, or only doing the drops on their favorite neighborhoods.

So, if you introduce a Pro-Equality tax, and drop all those revenues by means of a Universal Basic Income scheme equally to everyone, both the hoarding and the redistribution profiteering will be small.

Sir, if we are not expecting to profit on the redistribution, is that not what we, poor and rich, all want and need? 

@PerKurowski ©

At what point do negative rates on government debt become absolutely incompatible with its zero % risk weight?

Sir, in reference to Dan McCrum’s “Fire up the printing presses for a useful jolt to the economy” August 5, this is what I have to say.

Government issues bonds, the public buy these, and central banks, wanting the economy to grow, then buy these from the public.

Then the public does not know what to do with that purchasing power given to them by the central banks and, wanting to play it “safe”, looks to buy government bonds, and so the interest rates on public debts goes further down.

And so then Martin Wolf and other recommend the government to take advantage of these low rates, in order to invest in infrastructure. And if government follows their advice, it will issue more bonds, and the public will buy these.

But since the economic punch from infrastructure investments vanishes quite fast if there are no one willing to use and pay the right price for it, the central banks will then buy more government bonds from the public… and on and on it goes.

And, to top it up, banks and insurance companies are told by their regulators: “If you do not buy 0% risk-weighted government bonds, then you have to cough up with more equity”. And so banks (and insurance companies and alike) buy more government bonds, and the rates on these keep falling and falling… where does it end?

At what point do negative rates become absolutely incompatible with a 0% risk weight? How much capital will banks then need to hold against government bonds? How do we get off this not at all merry merry-go-round?

And to top it up, meanwhile, if SMEs or entrepreneurs, those who could perhaps best help to get the real economy going, want the opportunity to a bank credit, banks are told that “since these clients are risky you need to hold more capital against their borrowings”. And so banks do not lend these clients the money, or, in order to compensate for the higher equity requirements, charge higher interest rates, making the “risky” riskier.

How the hell did we land in this hole? I know!

PS. With respect to their future pensions, are central bankers and regulators isolated from their decisions? Should they be?

@PerKurowski ©

August 04, 2016

Bank regulators should not discriminate in favor of the “safer” past and present, and against the “riskier” future.

Sir, Mariana Mazzucato writes: “On the finance side, the problem is not quantity but quality: industrial and innovation policies require long-term, strategic finance, while the UK continues to reward short-term finance. The few attempts at building sources of patient public finance have been neglected” “A strong industrial strategy has many benefits” August 4.

What already exists, the past and present, is generally perceived as safer than what is planned to exist, the future.

And so when regulators decide that what is ex ante perceived as safe requires banks to hold less capital than what is perceived as risky, they allow banks to leverage their equity, and the support of society (taxpayers), much more with the past and present than with the future.

And since regulators have also decreed the sovereign to be infallible, and set the risk weigh for it at 0%, while the risk weight for an ordinary SME or entrepreneur is 100%, regulators similarly allow banks to leverage more when lending to the government than when lending to the private sector.

I have no objection to governments trying to do some of the pro-investment efforts that Mazzucato writes about in her article but, before that, and much more important for the long term, we need for the current regulatory distortions of the allocation of bank credit to the real economy to disappear.

What would the interest rate of public debt be if all hidden regulatory subsidies of it are removed? I have no idea, but perhaps then “the successful Green Investment Bank” might not be that successful.

@PerKurowski ©

August 03, 2016

Loony technocrats told countries: “In order for you to develop and grow, your banks must avoid taking risks”

Sir, Professor Angus Deaton writes: “The ‘what works’ agenda also runs of the risk of replacing what (local) people want by what (often foreign) technocrats think they ought to have. It is these unintended consequences that explain why many projects succeed while the country fails.” “There is a solution to the aid dilemma” August 3.

What if one of these foreign technocrats would tell a developing country the following:

"You should require your banks to hold more capital against what is perceived as risky so that it earns higher risk-adjusted returns on its equity on what is perceived as safe, like the government and the financing of houses; and so that they stay away from lending to the risky, like SMEs and entrepreneurs."

With that these foreign bank regulation technocrats would de facto have told a developing country that it must foster risk aversion among its banks. Absolutely crazy! To give a developing country such recommendations is criminally dumb, but that is precisely what the Basel Committee has and is instructing.

Of course these regulations affects developed countries too, as it hinders them from further climbing up the ladder of development, but, in their case, they have at least reached an fairly reasonable height… although that also means the fall could be bigger.


PS. Let me quote the following from John Kenneth Galbraith’s “Money: “whence it came, where it went” (1975):

For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created] 


It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.


Per Kurowski

August 02, 2016

FT, when banks have less capital against assets, how can you be sure their capital positions have strengthened?

Sir, Thomas Hale and Richard Blackden write: “The weakness this month comes in spite of stress test results on Friday from the European Banking Authority, which showed banks’ capital positions have strengthened over recent years”. “European bank shares fall in brutal start to August” August 2.

Yes, if we are to use the regulators’ risk weights, one could say “the capital positions have strengthened over the recent years. But why should we? The risk weights of 20% given by regulators to AAA rated securities and sovereigns like Greece were not that correct. 

The real truth is that, unfortunately, the real gross undistorted capital position of banks, the assets to equity leverage, has, according to EBA, deteriorated from 19.2 to 23.8 to 1.
@PerKurowski ©

QE-forever cycle of fiscal stimulus, with current bank regulations, can only generate a dangerously obese economy.

Sir, Satyajit Das opines that “QE-forever cycle of fiscal stimulus won’t generate a recovery” August 2.

He is absolutely right! A recovery, to be for real, to be sustainable, requires a dose of risk-taking, which is currently being negated as a result of the risk-weighted capital requirements for banks. Allowing banks to leverage more with what is perceived as safe, than with what is perceived as risky, allows banks to earn higher risk-adjusted returns on equity with what is perceived as safe than with what is perceived as risky… with expected consequences.

And credit to what is safe, mostly refinancing the safer past, provides mostly carbs to the economy, which results in flabby obesity. It is credit to the riskier future that can provide the best proteins an economy needs to grow muscular and sustainable.

And for sure, the negative rates, a subsidy for "the safe" doing something with money, is a clear expression of how obese our economies have already become.


@PerKurowski ©

August 01, 2016

FT, how can you with a straight face hold that bank capital buffers in EU are more ample than they were five years ago?

Sir, you write “True, banks’ capital buffers are more ample than they were five years ago”, “EU bank regulators need to do more to foster faith”, August 1.

More ample? That is just if you believe the regulators’ risk weights are correct… something which was evidenced in 2007-08 they were not.

Because, if you read EBA’s stress result, you should have read that “the aggregate leverage ratio decreases from 5.2% to 4.2% in the adverse scenario”.

And in terms of real leverage that means that in their “adverse scenario” the bank leverage of equity increased from 19.2 to 23.8 to 1… and that’s just the average!... Which means the real capital buffers, those of real unadulterated life, are just smaller.

@PerKurowski ©

The most stressful banks to me are those who least help the future of our real economy.

Sir, Laura Noonan, Rachel Sanderson and James Shotter present EU’s bank stress test results. “Bank stress tests single out the usual suspects” August 1.

And it ranks the banks based on their 2018 fully loaded common equity tier one ratio, which is CRD IV Common Equity Tier 1 capital divided by CRD IV Risk Weighted Assets. And so let us be very clear, if the risk weights used are wrong, the results are absolutely meaningless.

Sir, how long will you all play along with the current regulators as if they were geniuses setting risk weights, as if they had any idea of what they are doing? Are you totally deprived of intellectual honesty?

If you go to EBA’s stress result you will read “The EU banking sector has significant shored up its capital base in recent years leading to a starting point capital position for the stress test sample of 13.2 % CET1 ratio at the end 2015… 2% higher than the sample of 2014 and 4% higher than the sample in 2011”. 

That’s great!... sort of… because it also states that “the aggregate leverage ratio decreases from 5.2% to 4.2% in the adverse scenario”. In terms of real leverage what does from 5.2% to 4.2% leverage ratio mean? It means that in their “adverse scenario” the bank leverage of equity has increased from 19.2 to 23.8 to 1… and that’s just the average!

How is it possible, an increase of the CET1 ratio, at the same time the leverage increases? Easy, banks take on more of those assets perceived, decreed or concocted as safe that carry low risk weights, and less of those assets perceived by bankers and regulators alike like more risky that carry higher risk weights, such as loans to SMEs and entrepreneurs. The real economy will suffer the impacts of this stupid and short-sighted regulatory risk aversion.

We should of course be concerned with the safety of our deposits in our banks… but, should we not concerned with that these banks take the risks needed to offer our children and grandchildren a future at least as good as that one our parents offered us? I sincerely think so.

PS. And it not only about the young. The welfare of future pensioners depend very much too on the health of the economy.

@PerKurowski ©

July 30, 2016

When raising carbon taxes, let’s try to keep the war against climate-change and the redistribution profiteers at bay

While the crude oil price index fell from 100% in 1980 to 18% in 1998, the products price index on the consumer level increased in the UK in constant terms from 100% to 247%; a result of that taxes on petrol went from 85% added value in 1980 to a confiscatory 456% in 1998. And the tax increase, similarly applied in other European countries was predicated on environmental reasons… even though for instance Germany and Spain, were simultaneously subsidizing coal. And when consumer protested the increase of petrol prices the blame was laid on the sheiks.

And now Tim Harford argues for the need to “raise the price of carbon-dioxide emissions, using internationally coordinated taxes or their equivalent [because] such a tax would make renewable energy sources more attractive – as well as encouraging energy-efficient technologies and behaviour”, “Alternative energy’s power struggle” July 30. 

Sir, even though I come from an oil extracting nation, Venezuela, that is something with which I could agree, but only under two conditions.

First that all the taxes and subsidies in the energy sector need to be absolutely transparent so that there is no hanky-panky going on.

And second, so that this do not just enrich many of the war against climate-change profiteers, all those tax revenues should be distributed equally to all citizens by means of a variable universal basic income. The beauty of it all is that doing so, would equally help, somewhat, to keep the many redistribution profiteers at bay.


Per Kurowski

We do not believe that the Venezuelan military can contemplate sending their compatriots to the starvation ovens.

My deceased father arrived on the first train to Auschwitz in 1940 as a Polish prisoner, and had number 245 tattooed on his arm. Freed in 1945 by the Americans, in 1947 he moved to Venezuela where he lived for over 30 years, worshipping that country all his life. And now I find Andres Schipani’s “Venezuela army tightens grip as food riots grow”, July 30, coincidentally published next to an AP brief “Silent pilgrim” and that reports on a visit of Pope Francis to Auschwitz.

And so I just must say the following Sir: My father would never ever have believed, as neither do I believe, that the Venezuelan military are capable of sending their compatriots to the starvation ovens. And, in this respect, we would both firmly believe that something has to happens to put a stop to the runaway craziness of the current Venezuelan realities, more sooner than later.

@PerKurowski ©

July 29, 2016

Banks, to get out of their dead-end street, must make a convincing case they can prosper holding much more capital.

Sir, James Shotter, Laura Noonan and Martin Arnold write: “At yesterday’s close, investors were implying that the biggest bank in Europe’s most stable economy [Deutsche Bank] is worth €17.7bn, just a quarter of the book value of its assets.” And then we read of efforts to better that by reducing operations and cutting down on risk weighted assets. In other words being placed in an Incredible Shrinking Machine. “Big Read: Deutsche Bank: Problems of scale” July 29.

Because of the risk weighted capital requirements, banks were set on a road of increasing returns on equity by diminishing the capital they needed. And, on that road they lost many opportunities, like lending to “risky” SMEs and entrepreneurs. And they also ended up in dangerously over-populated safe-havens that, when compared to the “risky”, suddenly offer lower real-risk adjusted returns. They now are in a dead-end street.

So, if it was me, I would try to make the strongest case possible to my shareholders that there are good and safe returns on equity to be obtained by ignoring Basel regulations. “Give us 12 percent in equity, against all assets, so as to allow us pursue the undistorted highest risk-adjusted returns out there.”

Sir, I have of course no idea if that is a viable strategy for any individual bank, such as Deutsche Bank. Most banks are caught between a rock and a hard place. They need to ask for much capital, but that much capital might be so much, that they could scare away everyone. Anyhow, I would not like to work in a bank that is going to stretch out the suffering by asking for more capital, again and again, little by little. To get it all and get over it would benefit everyone, including current shareholders.

Is that impossible? Not really, here “one of the bank’s top 20 investors” is quoted with “The problem for Deutsche is that it has got to the stage where if it continues to cut assets, it is going to lose a significant amount of revenues”.

And on a different issue, the litigations and fines banks face, I repeat what I said over the years. 

When we all know that for the banks’ good and for our economies’ good banks need more capital, to extract fines paid in cash is irresponsible and masochistic. All those fines should be paid in shares.

@PerKurowski ©

July 28, 2016

Any central banker that distorts, just as he likes, the allocation of bank credit to the real economy, is not to be trusted

Sir, John Authers writes: “If I report that government bonds are selling for unprecedented low yields, because investors are looking for safe places for their money — both of which are undeniable and unexceptional propositions — abuse follows. Markets are fixed! Yields aren’t really that low!” “Central banks are not the enemy: Monetary policy has stayed too loose for too long: that is a failure of politicians” July 28.

In this context am I abusing when I hold that markets are to a very important extent fixed, only because banks are looking for places for their money that does not require them to hold much capital? I don’t think so!

And Authers writes: “Markets are not efficient, and are often wrong…But they are not part of a political process, and ignoring them is not an option. When they set the price at which we can borrow, or at which we can exchange currency, they create truths we have to live with”

Absolutely, but in this case bank regulators, most from central banks imposed their truths on the market.

Sir, though regulators would love you to do so, do not forget what assets caused the 2007-08 crisis.

Those were what was ex-ante perceived, decreed or concocted as very safe, and which, for that reason only, the regulators allowed banks to hold these assets against very, very little capital.

Assets perceived as risky do no set off major bank crises, that distinction belongs to what is perceived as safe, and that is what our dumb regulators ignored

And what has much stopped the economy from recovering in the face of enormous injections of liquidity? That the liquidity, because of bank regulations, central banks, are not allowed to flow freely by means of bank credit to the “risky”, the SMEs and entrepreneurs.

Of course I would love to trust central banks, but I just can’t. Anyone who comes up with an idiotic and statist idea like that of assigning a risk weight of 0% to the sovereign and 100% to us We The People, is not to be trusted.

@PerKurowski ©

Basel risk-weights: Sovereign 0% - We The People 100%. How on earth did we fall into that idiotic statist trap?

Sir, David Stubbs discusses accurately many risks with sovereign debt, risks that are not new, have never been, but that are appearing more clearly now. “Sovereign bonds can steady a ship but their anchor days are over” July 28.

But what Stubbs leaves out is the amazing fact that, for the purpose of risk-weighing the capital requirements for banks, the Basel Accord, Basel I, in 1988, set the risk-weight for the sovereign at 0% and that of “We The People” at 100%... and no one said a damn word about it. The only discussions thereafter were promoted by some shadier sovereigns that also wanted to be risk-weighted at 0%.

Sir, you can be sure of one thing, Greece, independently of how much it hid information, would never have been able to get so much credit, had there not been for the minimalistic bank capital requirements against its loans.

Runaway statism is what was, and is, behind it all. By allowing banks to leverage their equity so much more with sovereigns’ debts than with citizens’ debts, they allow banks to earn much higher “expected” risk-adjusted returns on equity when lending to sovereigns than when lending to citizens, so banks will favor lending to sovereigns over lending to citizens.

And that means de facto that bank regulators are acting as believing government bureaucrats know better what to do with bank credit than citizens. How on earth did we fall into that trap?

Would the actual level of sovereign debts around the world be sustainable without the regulatory subsidies? That is indeed a nasty question.

PS. A letter in FT November 2004 “How many propositions will it take before the Basel Committee, the bank regulators, start realizing the damage they are doing by favoring so much bank lending to the public sector.”

@PerKurowski ©

July 27, 2016

Just you wait till the young discover what the Basel Committee for Banking Supervision has been doing to their future

Sir, Anne-Sylvaine Chassany tells us that “Océane, a 21-year-old Nice resident with purple hair, tattooed forearms and stretched earlobes would love to move to London and open a tattoo parlour” “A waitress with tattooed arms opens my eyes to the youth vote” July 27.

Well that would quite likely require Océane to get a bank loan. But what would Océane say if she understood that her chances of getting a loan at reasonable rates, which might never have been that great to begin with, are now much smaller, because of the regulators.

The risk-weighted capital requirements favors the lending to what is perceived, decreed or concocted as safe, that which always have had ample access to bank credit, over the lending to the risky… and by favoring it unfairly discriminates against the access to bank credit of those ex ante perceived as risky. 

One day, some researcher will calculate the number of loan applications by SMEs and entrepreneurs that have been denied, or approved at much higher interest rates, as a direct consequence of these regulations. When those figures are published and the young realize discovers that banks stopped financing their risky future, and are only now refinancing the safer past, like placing a reverse mortgage on the economy, then, as long as the young are able to look up from their iPads, all hell could and should break lose.

Hear the young: “Baby-boomers why did you do that to us? The banks of your parents did take the risks needed for your future!”

And nothing can foster inequality as much as denying opportunities of fair access to credit… with “fair” meaning here, a not-distorted free-market based risk evaluation process.


@PerKurowski ©

July 26, 2016

If banks want to keep the society’s support, they must again become efficient allocators of credit to the real economy.


Sir, Simon Samuels, a banking consultant, writes that “the priority of regulators and policymakers in Europe…should be developing financing solutions other than banks from which customers can borrow” and one way he suggests is “to give borrowers an incentive to shun banks and so deepen Europe’s capital markets.” That sure does not sound like a consultant working for the long term interest of his clients. Does Samuels really believe banks will keep the huge taxpayer support they now have, if they abandon lending to all in the real economy? “Bank regulators, be careful what you wish for” July 25.

But then Samuels dutifully defends the profitability of banks by warning against increased capital requirements. He writes: “If the return on equity from mortgage lending or corporate lending falls by more than half — as has been widely estimated under the proposals as drafted — then banks will either ration lending in these areas or try to raise prices.”

But Samuels also keeps mum about the fact that, for the purpose of the capital requirements for banks, the risk-weight for mortgage lending is 35%, while the risk weight for any corporate rated BBB+ or below is 100% or more. Which means that banks already earn much higher risk-adjusted returns on equity when financing houses, or investing in other perceived, decreed or concocted safe assets, than when financing those “risky” SMEs and entrepreneurs, those that could create the jobs needed for house owners to service mortgages and pay the utilities.

Of course, as someone interested in the well-being of the real economy, I would also tell the regulators to go very easy on the increase in any capital requirements for banks. But, much more than that, as I have done for soon two decades, I would beg regulators to eliminate that regulatory risk-aversion that has stopped banks from financing the risky future and now have these only refinancing the safer past.

If the banks and bankers forget that their role is to allocate credit efficiently to the economy, and that that is the only reason why society supports them, they will very soon be out of business… and out of bonuses.



@PerKurowski ©

“Climb every mountain”? No way! The sissy Basel Committee instructs banks to “Climb only safe hills”.

Sir, Mohamed El-Erian refers to issues (such as Brexit) that “could change longstanding economic and financial relationships, affect the way economic agents interact with each other, fuel political anomalies and, in the case of unusual asset class correlations and valuations, undermine some of the institutions and basic tenets of the capitalist system.” “Period of artificial calm distracts from potential for storms” July 26.

And El-Erian writes: “These issues share a potential for fuelling so-called jump conditions in which there is a leap to a different set of circumstances, rather than a smooth and incremental evolution.”

Well let me remind El-Erian, and you Sir too, that one of the most impacting “jump-conditions”, was the introduction of the risk-weighted capital requirements for banks. These allowed banks to earn higher risk-adjusted returns on equity on assets perceived, decreed or concocted as safe, than on assets perceived as risky. And, of course, much of what was ex ante safe, became ex post dangerous, when too many went there.

Much contrary to Mother Abbess’ inspirational “Climb ev’ry mountain”, which in Sound of Music encourages people to take every step towards attaining their dreams, the Basel Committee for Banking Supervision, has de facto instructed banks to “Climb only safe mountains”.


@PerKurowski ©

July 25, 2016

Pray the Paul Romer/World Bank union realizes the dangers of regulatory risk-aversion and the benefits of risk-taking

Sir, I refer to the appointment of Paul Romer, one of the pioneers of “endogenous growth theory”, as the new chief economist of the World Bank, “The World Bank recruits a true freethinker” July 24.

Hopefully the Paul Romer/World Bank link could help both sides realize that risk-taking is the oxygen of any development, and so that then they could both push against the silly risk-aversion of bank regulators, that which only causes safe-havens to become dangerously populated, and risky-bays dangerously unexplored.

From what I have read the vital willingness to take risks is not included in Romer’s vision of endogenous growth; and I myself have failed miserably in convincing the World Bank, the world’s premier development bank, to stand up against bank regulators, the Basel Committee and the Financial Stability Board, as well as the IMF… though God knows how I tried… even as an Executive Director of the World Bank 2002-04.

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



@PerKurowski ©

July 23, 2016

Most economists do still not understand the current regulatory distortion of the allocation of bank credit to the real economy.

Sir, Tim Harford, when analyzing and questioning the economic arguments on Brexit writes of “the low reputation of economists, the result of a global financial crisis that only a few in the profession warned us against”, “Metropolitan myths that led to Brexit” July 23. And among “the four articles of centre-left faith” Harford brings up that of the “economists are reliably wrong”.

Yes, the economists did not warn, as they should have done, had they been interested, as they should have been. But so much worse is it that, after all the evidence of a crisis that breaks out because of excessive exposures to “safe” assets, those assets against which banks were allowed to hold very little capital, most economists do still not understand how the risk-weighted capital requirements for banks distorts the allocation of bank credit to the real economy. Or is it they just do not care? Or is it that they just do not dare to criticize?

I am just going through “Progress and Confusion: The State of Macroeconomic Policy” edited by Olivier Blanchard, Raghuram Rajan, Kenneth Rogoff and Lawrence Summers; recently published by IMF and MIT. The book has its origin in a conference organized by IMF in April 2015 titled “Rethinking Macro Policy”, the third one.

In it only Anat R. Admati refers to “distortion” and writes: “The presence of overhanging debt creates inefficiencies… In banking such distortions may result in biases in favor of speculative trading or credit card or subprime lending and against creditworthy business”.

Good for her, Admati is one of the few on the right track. Unfortunately, she has not yet fully grasped the fact that allowing banks to leverage their equity, and the support they receive from society differently, depending on ex ante perceived risks, produces a totally different set of expected risk-adjusted ROEs than those that would result without such regulatory distortion.

And the confusion between ex ante perceived risks and ex post realities persists. When Admati mentions “subprime lending” she refers to it as something risky, forgetting the risk-weights for those operations was (and is) 20 to 35%; and when she writes about “creditworthy business”, most of it was (and is) risk weighted at 100%

Frankly, all those economists who regulate banks without clearly defining the purpose of the banks, are putting a very black mark on our profession.

All risk management must begin by clearly identifying those risks we cannot afford not to take… and, in banking, we cannot afford the banks not to take the risks the real economy needs.


@PerKurowski ©