My voice and noise on subprime bank regulations

Let us thank our lucky star the credit rating agencies were not that good

noreply@blogger.com (Per Kurowski) — Thu, 09 Feb 2012 20:49:00 +0000

Bank regulators gave tremendous importance to credit ratings, especially in the Basel II package approved in June 2004.

One of the problems with that is that if a credit rating has already been issued, and if it is good one, like an AAA, there is absolutely no incentive for a second opinion, as no one is going to pay the price of a second opinion that might differ from the first opinion, only once in awhile. And this is especially true if the First and Official Opinionater, has had access to privileged information about the borrower, as they very often have.

Though we are indeed already suffering seriously the consequences of some of the credit ratings being wrong… can you imagine where we would be if they had delayed making their mistakes ten more years, and the banks and regulators had had the time to invest so much more trust in them? Can you imagine the altitude from which we would have fallen?

Indeed there is someone looking after us! So at least let us be grateful for that and make amends!

PS. What on earth do you think I was referring to, when in January 2003, in a letter to the Financial Times I wrote, “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds”?

Homeland Security, what if terrorist infiltrated bank regulations?

noreply@blogger.com (Per Kurowski) — Fri, 27 Jan 2012 01:10:00 +0000

What if terrorists infiltrated our bank regulations and tricked us to impose capital requirements on banks which would: guarantee the dangerous overcrowding of all the officially perceived safe financial havens, like triple-A rated securities and infallible sovereigns; and that those officially perceived as risky, like the small businesses and the entrepreneurs, though indispensable for the economy, would find their access to bank credit much more difficult and much more expensive than usual.

Well, I do not believe one iota in that some financial terrorists did it, but those capital requirements were instituted, and the AAA-bomb explosion resulted, and that should be what really matters now.

A fundamental question to the Republican candidates that has never been posed

noreply@blogger.com (Per Kurowski) — Thu, 26 Jan 2012 15:47:00 +0000

Currently, the banks of the United States of America, the land of the brave and the home of the free, if they lend to an American small business or an American entrepreneur need to hold about 8 percent in capital, but, if lending to the US government they need zero capital.

Do you believe this is how it should be and do you believe this helps job creation?

“Margin Call” sells it as a surprised discovery of faulty volatility assumptions. Bullshit!

noreply@blogger.com (Per Kurowski) — Mon, 16 Jan 2012 16:02:00 +0000

October 19, 2004, in a formal statement delivered as an Executive Director at the World Bank Board I wrote:

“Phrases such as ‘absolute risk-free arbitrage opportunities’ should be banned in our ‘Knowledge Bank’. We (I) 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.”

And I was even only a lowly financial and strategic consultant who had never worked in the area of investment banking or portfolio management.

As others who might have made similar warnings I was just too right too early… and therefore I and many others are now being ignored by all those who have an interest in wanting to explain the current crisis as a Black Swan event… and by those media producers who feel more comfortable with their Monday Morning Quarterbacks.

Stop the Basel Committee from peddling its hallucinogen, its banker’s belladonna

noreply@blogger.com (Per Kurowski) — Mon, 16 Jan 2012 14:14:00 +0000

Capital requirements for banks which allow for very little bank equity when the credit ratings are good, and require more of it when they are not, is a very dangerous hallucinogen, in that it increases the sensitivity of the banks to the signals the credit ratings emit.

This, the banker’s belladonna, is precisely the cause of the monstrous crisis that is threatening the whole Western World. Its consumption causes growing excessive dangerous bank exposures to what is officially perceived ex-ante as not risky, like to triple-A rated securities and to infallible sovereigns, and a growing, equally dangerous, bank underexposure to what is officially perceived as risky, like of the lending to small businesses and entrepreneurs.

We need bank regulators who know that a risk signal can only be valid if interpreted adequately. Occupy Basel!

http://subprimeregulations.blogspot.com/2011/04/basels-monstrous-regulatory-mistake.html

In banking, when will the shadows take over?

noreply@blogger.com (Per Kurowski) — Thu, 12 Jan 2012 18:28:00 +0000

Bank regulators, in Basel II, allow the banks to lend to a corporate rated AAA holding only 1.6 percent in capital but require them to have 8 percent when lending to a BBB rated corporate. That discrimination, when compared to what would have happened in an undistorted market, results of course in much more lending and at cheaper rates to the “safe” AAAs, and much less and more expensive lending to the BBBs.

That of course led to the current crisis of overexposures to what is perceived ex-ante as absolutely not risky; and the continuously dangerous overcrowding of safe havens, like lending to AAAs and infallible sovereigns; and the insufficient exploration of risky but potentially rewarding bays, like lending to small businesses and entrepreneurs.

The question is, how much can you discriminate against risk-taking in the formal banking sector before the shadow banking, “la banca sommersa”, takes over?

What would Mark Twain say about our current bank regulations?

noreply@blogger.com (Per Kurowski) — Wed, 04 Jan 2012 12:47:00 +0000

Do you remember Mark Twain’s saying about the banker lending you the umbrella when it shines and taking it away when it rains? Well now thanks to bank regulators the banks are also earning immensely higher risk-adjusted returns on their equity lending the umbrella when it shines than when lending it when it rains. How come?

Currently, if a bank lends to a small business or an entrepreneurs, those deemed officially as “risky” by the regulators, it is required to have about 8 percent in capital, but, if lending to an officially ex-ante deemed not risky, like the triple-As or the infallible sovereigns, the banks needs to hold very much less capital, sometimes even zero.

Does this make our banks more productive? Of course not! We risk-adverse citizens, have always been grateful for the service our banks provides the society, channeling our savings to those who can generate economic growth, and decent jobs for our grandchildren… which basically means taking risks on small businesses and entrepreneurs, not lending to what is so “not-risky” it can easily raise funds elsewhere.

Does this make our banks safer? Of course not! No systemic bank crisis has ever occurred because of excessive exposures to what is ex-ante perceived as risky, these, exactly like the current one, have always resulted because of excessive exposure to what was ex-ante perceived as absolutely not risky, and ex-post turned out to be very risky… often because the safe-havens became dangerously overcrowded.

And so what would Mark Twain say now? Since after this crisis, that threatens the whole Western World, we insist in using the same failed regulators using the same failed regulatory paradigm, he would just elegantly (through a time machine) defer to Albert Einstein’s "we can't solve problems by using the same kind of thinking we used when we created them" and, of course, “insanity is doing the same thing over and over again and expecting different results”.

A question about the Wolfson Economic Prize

noreply@blogger.com (Per Kurowski) — Tue, 13 Dec 2011 22:37:00 +0000

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.

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

noreply@blogger.com (Per Kurowski) — Mon, 12 Dec 2011 10:57:00 +0000

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)?

And I have even explained much of the problem personally to Lord Adair Turner, quite some time ago.

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

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

noreply@blogger.com (Per Kurowski) — Wed, 23 Nov 2011 21:23:00 +0000

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

The lunacy and the obscenity of current bank regulations

noreply@blogger.com (Per Kurowski) — Mon, 14 Nov 2011 10:40:00 +0000

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

What Niall Ferguson left out

noreply@blogger.com (Per Kurowski) — Fri, 11 Nov 2011 17:35:00 +0000

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 the importance of ex-ante perceived risk, 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

Who did the eurozone in?

noreply@blogger.com (Per Kurowski) — Thu, 10 Nov 2011 16:23:00 +0000

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”, and that had to do with the fact there was no escape-route for the euro I also wrote: “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!

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

noreply@blogger.com (Per Kurowski) — Mon, 07 Nov 2011 20:21:00 +0000

Basel I, II, II.5, III are based on stimulating banks to do lending and investing in what is ex-ante perceived as “not-risky”, like triple-A rated securities and "solid" sovereigns like Greece, precisely the terrains where all systemic bank crisis occur, including of course the current, and disincentives the 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?

Poor "systemic irrelevant financial institutions"

noreply@blogger.com (Per Kurowski) — Fri, 04 Nov 2011 15:43:00 +0000

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.

Greece, a great referendum… one more!

noreply@blogger.com (Per Kurowski) — Tue, 01 Nov 2011 12:53:00 +0000

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…

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

noreply@blogger.com (Per Kurowski) — Sun, 30 Oct 2011 10:57:00 +0000

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

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

noreply@blogger.com (Per Kurowski) — Thu, 27 Oct 2011 13:35:00 +0000

"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 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

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

noreply@blogger.com (Per Kurowski) — Thu, 27 Oct 2011 01:06:00 +0000

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.

noreply@blogger.com (Per Kurowski) — Wed, 26 Oct 2011 14:47:00 +0000

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

Current bank regulations cause criminal harm to the economies.

noreply@blogger.com (Per Kurowski) — Mon, 24 Oct 2011 22:29:00 +0000

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

Lord Adair Turner on the Euro

noreply@blogger.com (Per Kurowski) — Sun, 23 Oct 2011 14:13:00 +0000

Lord Adair Turner recentlysaid “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 still is “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 and 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

If only those of Occupy Wall Street knew

noreply@blogger.com (Per Kurowski) — Sat, 15 Oct 2011 14:10:00 +0000

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

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

noreply@blogger.com (Per Kurowski) — Sat, 08 Oct 2011 02:03:00 +0000

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?

noreply@blogger.com (Per Kurowski) — Sat, 08 Oct 2011 01:59:00 +0000

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