Sunday, April 13, 2014

You the young in Europe, you don’t find jobs? Thank your sissy bank regulators for that!

You the young in Europe, especially you the unemployed, listen up!

Your bank regulators set up a system by which they allowed the banks to earn much higher risk adjusted returns on equity for what was considered safe, like AAA rated securities, real estate in Spain and lending to Greece… something which the banks liked very much, and therefore they lent too much, like to AAA rated securities, real estate in Spain and Greece, and which you all know by now caused the mother of all disasters.

And as a result of the same system your banks earn much less risk adjusted return on equity when lending to the “risky” medium and small businesses, entrepreneurs and start-ups, and so the banks, naturally, do not lend to those who could perhaps most provide you with the next generation of decent jobs.

And so, if you occupy Basel, in order to protest the Basel Committee, let me assure you that you have my deepest sympathy, and my full understanding… Good luck! You need it, the baby-boomers have much power. 

Per Kurowski

Do you hold any views on the issue of risk aversion vs. willingness to take risks in the Judeo-Christian tradition?

Current bank regulators, by allowing banks to hold much less capital (equity) when lending to someone perceived as “safe” than when lending to someone perceived as “risky”, have caused the banks to earn much higher risk adjusted returns on equity when lending to “the infallible” than when lending to “the risky”.

This, as I see it has introduced a serious risk aversion, or an unwillingness to take the risk which constitutes the oxygen of development, and that is very dangerous to the western world… where in its churches we used to sing “God make us daring”.

Are there any historians out there who have special knowledge on the issue of risk aversion vs. willingness to take risks in the Judeo-Christian tradition?

Why do the Basel Committee, the Financial Stability Board and the IMF not understand what any normal parent does?

If children were rewarded with ice cream for eating cookies, and punished with spinach for eating broccoli, chances are too many kids would turn out to be obese… and almost anyone would understand and know that.

And so why does the Basel Committee, the Financial Stability Board and the IMF not understand that, if you reward bankers with allowing them to hold less capital when lending to “the infallible”, so that they can earn higher risk adjusted returns on equity; and punish the bankers with having to hold more capital when lending to “the risky”, to make it harder for the banks to earn sufficiently high risk-adjusted return on equity, then banks will lend much too much to “the safe” and much too little to “the risky”… and a crisis in the banking system and in the real economy will ensue.

Friday, April 11, 2014

IMF, where have you been since the financial crisis broke out in 2007?

In January 2003, while being an Executive Director at the World Bank, in a letter published by FT, I wrote: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic error to be propagated at modern speeds. Friend, please consider that the world is tough enough as it is.”

And as predicted, with the help of the capital requirements for banks much based on credit ratings concocted by the Basel Committee in Basel II, the rating error of the AAA rated securities backed with mortgages to the subprime sector in the US, was propagated into trillions of dollars in exposures, even in faraway Europe.

And now, soon seven years after the outbreak of the crisis, we read a compendium of articles published by the International Monetary Fund, under the not so humble title of “Financial Crises: Causes, Consequences, and Policy Responses”, and in which we do not find one single reference to the risk-weighted capital requirements.

There is one reference though to credit ratings: “Credit ratings also deteriorate notably before a default, and improve only slowly in the aftermath of debt restructuring”. But that reference, if anything, makes it even clearer why the IMF should be opposed to the risk weighted capital requirements.

Also, in the World Economic Outlook, April 2004, that has a chapter titled “Perspectives on Global Real Interests, we do not find one single reference, or adjustment to the fact that allowing banks to hold sovereign debt, at least that of “the infallible”, against no capital, translates effectively into a subsidy of public debt, and which makes historical comparisons of rates not longer really valid.

And the Global Financial Stability Report, April 2014, also clearly evidences IMF has still not understood how the risk-weighted capital requirements for banks not only distorts the allocation of bank credit but also, by amplifying the effect of any insufficient perception of risk, becomes one of the most important sources of instability in our financial system.

Saturday, March 29, 2014

If the Basel Committee had had anything to do with it we, the Western World, would not be cycling.

If the largest of the apprehensions of our mother and of our grandmother about cycling had determined our bicycling, we would still be cycling.

But, if the apprehensions of our mother and our grandmother about cycling had been added up, we would not been cycling.

And that is another way to explain how, when our bankers apprehensions about lending to “the risky”, those reflected in higher interest rates, smaller loans and tighter conditions, got added up to our bank regulator’s apprehensions about risks, those reflected in the capital requirements... it all resulted in our banks not lending to “the risky”, like to the medium and small businesses, entrepreneurs and start-ups.

We need to stress test our bank regulators too! How? Analyze what assets banks do now not have on their balance sheets... thanks to the regulators' interfering and arrogantly playing risk managers for the world

God save us from these regulators.... God please make us daring!

Tuesday, March 25, 2014

CFPB concern yourselves more with why Payday borrowers need to borrow, than with the conditions and the rates they borrow at

Yes, the Payday borrowers borrow too expensively, but… the other side of that coin is that medium and small businesses, entrepreneurs and startups, those who most could give the Payday borrowers an opportunity of not having to borrow, borrow less, and at higher risk-adjusted rates, than the “infallible sovereigns” and the AAAristocracy… thanks to the colleagues of CFPB… the regulators 

I just wish that CFPB would dare to look into the odious discrimination and odious distortion in the allocation of bank credit to the real economy that the risk-based capital requirements for banks cause.

Thursday, March 20, 2014

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

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

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

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

Wednesday, March 19, 2014

The tyranny of [bank regulatory] experts. The forgotten rights of “the risky” to access bank credit.

Bank regulatory experts in the Basel Committee, and the Financial Stability Board, with their risk based capital requirements, by allowing banks to earn much higher risk adjusted returns on equity when lending to “The Infallible”, are blocking the access of “The Risky” to bank credit.

With that these tyrants are killing our economies… Who authorized them to such odious and senseless discrimination? Did we not become what we are because of risk taking? 

World Bank, IMF what’s wrong with you? You must know this is not right.

Note: Inspired by William Easterly’s “The Tyranny of experts

Saturday, March 15, 2014

European Union, ask the Basel Committee about regulatory distortions in the allocation of bank credit to the real economy

Regulation (EU) No 575/2013 dictated by The European Parliament concerning Prudential Requirements for Credit Institutions and Investment Firms establishes:

“44. Small and medium-sized enterprises (SMEs) are one of the pillars of the Union economy given their fundamental role in creating economic growth and providing employment. The recovery and future growth of the Union economy depends largely on the availability of capital and funding to SMEs established in the Union to carry out the necessary investments to adopt new technologies and equipment to increase their competitiveness. The limited amount of alternative sources of funding has made SMEs established in the Union even more sensitive to the impact of the banking crisis. It is therefore important to fill the existing funding gap for SMEs and ensure an appropriate flow of bank credit to SMEs in the current context. Capital charges for exposures to SMEs should be reduced through the application of a supporting factor equal to 0,7619 to allow credit institutions to increase lending to SMEs. To achieve this objective, credit institutions should effectively use the capital relief produced through the application of the supporting factor for the exclusive purpose of providing an adequate flow of credit to SMEs established in the Union.”

Favoring bank lending to the SMEs this way, implies that the European Parliament admits that the risk weighted capital requirements for banks distort the allocation of bank credit to the real economy. The question then is why has not the European Union, the European Parliament, formally asked the Basel Committee on Banking Supervision, about the implications of such distortions. Is that issue not of utmost importance? Have they, when regulating, not given any considerations to the purpose of banks?

And by the way where did the European Parliament get 0,7619 from? And by the way that still equates to an effective risk weight that is 3 times higher than that applicable to any AAA rated company which might be taking a bank loan only to repurchase its own shares.

And if this is the way to go would the European Union consider to design a similar “supporting factor” for any bank lending which promotes the sustainability of planet earth?

Wednesday, March 12, 2014

Basel III, risk based capital requirements, leverage ratio, distortions, and “The Drowning Pool”

I have for years seriously criticized the distortions in the allocation of bank credit to the real economy that the risk based capital requirements of Basel II produce. And now I am often being answered that these distortions have been in much removed because of the introduction in Basel III of the 3 percent leverage ratio, that which is applied on all assets without any risk weighing.

Unfortunately the truth is that could make the distortions even worse, and equally unfortunate, the why of it, is not so easy to explain… and so here I give it another go.

Have you seen “The Drowning Pool”, where Paul Newman and Gail Strickland are locked in a hydrotherapy room, with the water rising to the ceiling? Well think of the capital requirements as the hydrotherapy room, and the leverage ratio as the water level. 

In Basel II, there was a lot of room for banks maneuvering around the risk-weights but, in Basel III, by means of the water level having risen, there is now less room-oxygen for the banks to breathe… and so the more the distortion.

And so Basel III by making the search for breathing space harder will therefore make banks even more loath to give credit to “the risky” those which regulators decided consume more oxygen-capital. Get it?


And of course that is not helped by the fact that, with the introduction of liquidity requirements which is also based on ex ante perceptions of risks, new sources of distortion are being introduced.

Monday, March 10, 2014

We must stop bank regulators from increasing the risks of our banking system… they´ve done enough damage as is.

The real risks for a bank regulator, and ours as well, has nothing to do with one or even a couple of banks going busts; it has all to do with the whole banking system melting down, or not doing well what it is supposed to do, namely to allocate bank credit efficiently in the real economy.

And that translates into that the risk of a bank regulator has little to do with the type of assets a bank holds, and a lot to do with the capacity of bankers to pick the assets the banks should hold.

But current bank regulators, with their risk based capital requirements, allow banks to hold extremely large amounts of assets against extremely little capital only because bankers, and sometimes regulators themselves, say they perceive these as being “absolutely safe”. And that allows banks to earn much higher risk adjusted returns on equity when lending to for instance the “infallible sovereigns”, the housing sector and the AAAristocracy, than when lending to the “risky” medium and small businesses, entrepreneurs and start-ups.

And that means, effectively, that regulators are assisting banks to create that kind of excessive exposures to what is perceived as “absolutely safe” which has been the source of all bank system crisis when these, surprisingly, turn out to be risky. And all this is worsened by the fact that when now one of these safe exposures blows up, banks stand there holding extremely little capital in defense.

And that also means, effectively, that our banking sector is not allocating sufficient bank credit to those in the real economy who are in most need of it.

And so to sum it up: current regulators are betting more than ever our whole banking system on the bankers being able to pick the right assets… while at the same time distorting the picking of those assets. Sheer lunacy! We need to get rid of them urgently.

Thursday, February 27, 2014

Regulators, what have the ex ante perceived as “risky” ever done to you, or to the banks?

Why do you require banks to hold more capital against loans to medium and small businesses, entrepreneurs and start-ups, only because these are perceived as “risky”, than the capital banks need to hold against loans to the “infallible sovereigns”, the housing sector or the AAAristocracy? 

Beats me! The former, those perceived as “risky” when originally incorporated in a bank balance, have never ever set of a major bank crisis, those crises have always resulted, no exceptions, because of excessive bank exposures to those erroneously perceived as "absolutely safe" .

And regulators, your risk aversion psychosis causes then banks to earn less return on equity when lending to the “risky” than when lending to the “safe”, and so banks stop lending to medium and small businesses, entrepreneurs and start-ups.

Is that really prudent from the perspective of keeping the real economy strong and sturdy so as to not pose a threat to the stability of the banking system? 

Is it because the “risky” are dirty, smelly and ugly when compared to the “absolutely safe”? Is that also the reason why you never invite them to Basel, or to other venues, so as to hear their opinions about these odiously discriminating risk-weighted bank capital requirements of yours? 

You've got to stop this nonsense… Now! If medium and small businesses, entrepreneurs and start-ups do not have access to bank credit in fair terms, our young will, no doubt about it, become a lost generation.

Wednesday, February 26, 2014

Mr. Stefan Ingves… I do seriously disagree with your “risk-based capital adequacy ratios”, and I dare you to debate it.

Mr. Stefan Ingves the Chairman of the Basel Committee on Banking Supervision delivered a speech titled “Banking on Leverage" during a High-Level Meeting on Banking Supervision, held Auckland, New Zealand, 25-27 February 2014.

In it Ingves stated: “Risk-based capital adequacy ratios have been the cornerstone of the Basel framework since it was introduced 25 years ago. Capital adequacy ratios measure the extent to which a bank has sufficient capital relative to the risk of its business activities. They are based on a simple principle: that a bank that takes higher risks should have higher capital to compensate. Of course, there are plenty of challenges in measuring risk -- something I will come back to shortly -- but I have yet to meet anyone who seriously disagrees with that simple principle.”

Well I am one who seriously disagrees with that principle… and I dare him to meet me and debate the issue.

A bank, when taking risks, high or low, should compensate for any probable expected losses, by means of interest rates (risk premiums), the size of the exposure, and other terms, like the duration of the loans and guarantees.

And, if the banker does his job well, and adjusts adequately to the risk, then capital has absolutely no role to play in that. And, if the banker does not know how to do his job well, and does not adjust adequately to the risks, then he should fail, the sooner the better for all, so that the bank accumulates as little combustible mistakes as possible.

But a bank regulator, like the Basel Committee, cannot and should not, entirely trust that all risks are being duly perceived by the bankers because, as we all know, there are such things as hidden risks and unexpected losses.

But any hidden risks and unexpected losses cannot be approximated by means of the perceived risks and the expected losses… in fact it is what is perceived as absolutely safe, what is expected to produce the smallest losses, and which therefore can lead to very high bank exposures, which always produce the most dangerous unexpected losses which pose a threat, not only to an individual bank, but to the whole banking system.

And so bank regulators should not require banks to have higher capital to compensate for higher perceived risk, as they do now, but require banks to have a reasonable level of capital in defense of what is not perceived… and since they can not presume to know about the hidden risks of unexpected losses, then they have no other alternative than to set one single capital requirements for all assets, independent of their perceived risks.

To have an idea of how much current risk based capital requirements miss the target, if anything, one could even make an empirical case for setting the capital requirements slightly higher for what is perceived as "absolutely safe" than for what is seen as "risky".   

And that would also eliminate a great source of distortion. The current capital requirements, more perceived risk more capital, less perceived risk less capital, translates into allowing banks to earn much higher risk-adjusted returns on equity on assets deemed as safe, than on assets deemed as risky… and that makes it impossible for banks to perform their function of allocating efficiently bank credit to the real economy.

Basel Committee, Financial Stability Board, know that Your risk-based capital ratios are stopping the banks to finance the risks our future needs to be financed, and only have banks refinancing the safer past. Our young, who now because of your regulations might end up being a lost generation, will hold You all accountable.

As I see it… anyone who allowed banks to leverage 62.5 to 1 on assets, only because these had an AAA rating… or allowed banks to lend to the “infallible sovereigns” against no capital at all, like the Basel Committee allowed for in Basel II, is just not fit to be a regulator. Capisce Mr. Ingves?

PS. Stefan Ingves also states that “The world's largest listed non-financial companies fund their assets around 50:50 with debt and equity. In banking, a more common ratio is 95:5” Let it be clear that 95:5 is 19 to 1 debt to equity… never ever, in the history of banking before the Basel Committee’s risk based capital ratios, have banks remotely been allowed to leverage this much, knowingly.

Saturday, February 22, 2014

Regulators, please, your only problems with banks begin when their risk models stop to function.

Now we read that “Under rules being implemented by the Federal Reserve and the Office of the Comptroller of the Currency, the biggest U.S. banks will use their own models for judging their riskiness.”

Are they nuts? 

Bank regulators should have no problems whatsoever when banks own internal models which determine the “expected losses” function well.

The regulators only serious problems begin when these models do no function well... and “unexpected losses” result.

And so, frankly, it seems utterly absurd to allow for regulations which are based on trusting the bank models to function well.

And in this case, trusting primarily those banks which because of their systemic significance most can hurt if their risk models do not work... is like doubling up on the mistake.

If anything, trust the small banks which, if and when they fail, do not hurt us as much.

Friday, February 7, 2014

“The Risky” those discriminated against by banks, and by regulators, need to have a voice at the Fed

I read that the State banking associations and several other groups sent a letter to President Obama on Tuesday urging the president to nominate a community banker to serve on the Federal Reserve Board of Governors. 

In doing so they write: We offer our request and recommendation in view of our shared desire for economic growth that reaches to all parts of our nation, and in the recognition that community banks are fundamental to achieving that growth.” 

And I entirely support such motion.

But, that said, if we are talking about the need of having a voice at the Fed, then no one needs it more at this injunction, than the medium and small businesses, the entrepreneurs and the start ups.

For a starter this is what they would say:

“We are punished by bankers with smaller loans, higher interest rates and harsher terms because we are perceived as risky from a creditor point of view. And that we understand... that’s life. 

But why must you regulators have to make it even harder for us to get loans at competitive rates by requiring the banks to hold more capital when lending to us than when lending to those of the AAAristocracy? 

We fully understand you must require banks to hold capital, and this primarily to be able to confront unexpected losses. But why would you think that we, we who represent higher expected losses, also represent the risk of higher unexpected losses? Is it not the other way round? Has history not proven sufficiently that the AAAristocracy is the most dangerous source of that kind of unexpected losses that can really shake the system?”

Sunday, February 2, 2014

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

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

Below is the link for filing it:


The complaint!

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

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

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

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

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

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

These regulations are therefore destructive and should be changed.

Friday, January 31, 2014

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

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

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

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

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

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

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

Thursday, January 30, 2014

The “too-big-too-fail” bank facilitators... or even promoters

The Basel Committee, with its Risk-weighting of Assets and Tier Capital mumbo jumbo, introduced horrendous confusion in the market.

One way to get a clearer picture of what banks are really up to, at least with respect to leverages, is to use that old trustworthy debt to equity ratio.

Using it on one of the European big bank´s balance sheets as of December 2012, I found that its Liabilities amounted to 1.96 T, I guess in Euros, and its Equity to 54.41bn. Well that would indicate a 36.02 Debt Equity Ratio.

Let me be clear… any bank regulator willing to allow for a higher than 12 to 1 Debt to Equity Ratio is most definitely a “too big to fail” bank facilitator, or even a promoter.

Tuesday, January 28, 2014

Inequality production 101

Lecture 2: Set much lower capital requirements for banks when lending to the "Infallible Sovereign" and the AAAristocracy than when lending to "The Risky", so that banks earn much higher risk-adjusted returns on equity when lending to the former than when lending to the latter.

That signifies that those who have made it thanks to risk taking in the past and/or are now perceived as "absolutely safe" will receive too much too cheap bank credit, while those perceived as "risky", and who have to risk it in order to make it in the future, will get too little and too expensive bank credit.

That guarantees the inequality of opportunities, and which as you should remember from Lecture 1, is the prime ingredient in any inequality production.