Friday, November 21, 2014

The tragic and not understood reality of a Mario Draghi ECB/SSM speech

Ladies and Gentlemen,


The current “crisis has caused many of our fellow citizens to question whether the European project can keep its promise of shared economic prosperity.”

In particular, we needed to decisively and credibly address the weaknesses in the banking sector. That is: “key to protecting citizens and businesses as taxpayers, depositors and borrowers.

And so I am happy to announce that ECB and our dear colleagues in the Basel Committee and the Financial Stability Board, have decided to continue imposing on banks capital, which means equity, requirements based on perceived risk.

More ex ante perceived risk-more equity; less ex ante perceived risk-less equity. 

And that means that our banks will keep on earning higher rates of return on equity when lending to for instance our infallible sovereigns and to members of the AAAristocracy, than when lending to risky medium and small businesses, entrepreneurs and start-ups.

And, as you can understand, banks will keep on acting according to those incentives… they’ve got no choice.

What do you think about that?

Yes I hear you… it did not work that well in Basel II… and insufficient job creation persist. Yes indeed, but you all know we are the experts and we know we can’t be wrong, and so we must insist, until we prevail.

Good night… and do not forget to turn out the lights!

Après nous le deluge

Wednesday, November 19, 2014

Current capital (meaning equity) requirements for banks are unethical, regressive, dangerous, stupid and promote inequality

Allowing banks to hold assets perceived as absolutely safe against much less capital (meaning equity) than against assets perceived as risky, allows banks to earn much higher risk-adjusted returns on bank equity when lending to the “absolutely safe” like the infallible sovereigns and the AAAristocracy, than when lending to the “risky”.

And that effectively hinders the fair access to bank credit of the “risky”… like that of the small businesses and the entrepreneurs.

And that effectively curtails opportunities and promotes inequalities.

And that odious regressive regulatory discrimination of the risky, as if these were not already sufficiently discriminated against, is unethical; and kills opportunities, which leads to ever increasing inequalities.

And that regulatory distortion is extremely dangerous since it impedes the banks to allocate credit efficiently, which means the real economy will, more sooner than later, stall and fall.

And finally it is all so useless and so stupid… because never ever has a major bank crisis resulted from excessive bank exposures to what was perceived as risky; these have all resulted from excessive exposures to what was erroneously perceived as absolutely safe.

Sunday, November 16, 2014

The Basel Committee, the Financial Stability Board and “The Parable of the Talents” Matthew 25:14-30

The governments, on behalf of us citizens, us taxpayers, support the banks in times of troubles, for instance by the Fed acting as a lender of last resort. And that can cost us citizens, us taxpayers, a lot.

But that risk of supporting the banks is not acceptable only in order to produce special profits to bank shareholders, or just to have the banks serve as a mattress where to safely stash away our money. It is accepted exclusively so that banks, by means of efficiently allocating bank credit, could help us to drive our economies forward.

And that willingness to support-the-banks-risk is, for its management, placed into the hands of bank regulators, like the Basel Committee and the Financial Stability Board.

But these regulators decided (on their own) that banks’ primary purpose was to avoid risks… something loony because that by itself would negate the reason for supporting the banks.

And so they concocted credit risk weighted equity requirements that made banks earn much higher risk-adjusted returns on equity when lending to those perceived as "absolutely safe", than when lending to "the risky".

And that regulatory risk aversion, besides stopping banks from lending to the risky, like to small businesses; also made banks lend excessively to what ex ante was perceived as absolutely safe, but that ex post turned out to be very risky, like AAA rated securities and Greece.

And that all resulted in a crisis that caused immense costs… this time without having generated sufficient and reasonable compensation in terms of creating sturdy economic growth.

And those risk adverse regulations now block our way out of the crisis... and might doom our young to become a lost generation.

And today in mass we were reminded of “The Parable of the Talents: Matthew 25:14-30, and of which I extract the following: 

14 “It will be like a man going on a journey, who called his servants and entrusted his wealth to them. 15 To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey… 

24 “Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. 25 So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’

26 “His master replied, ‘You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? 27 Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest. 28 “‘So take the bag of gold from him and give it to the one who has ten bags. 29 For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them. 30 And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth.’
And in the sermon we later heard abut the dangers of caution and of playing it safe; and about the security that comes from risk-taking.

And there was a reference to Erikson’s Theory… with its Generativity that includes reaching out to others in ways that give to and guide the next generation, and a commitment which extends beyond self; versus Stagnation with its placing own comfort and security above challenge and sacrifice, and its self-centered, self- indulgent, and self-absorbed.

And we prayed for “courage so that we can walk in the way of the Lord”… and of course I was reminded of “God make us daring!

And so I naturally identified with the “Master” in wanting to throw those “wicked lazy” bank regulators “outside, into the darkness, where there will be weeping and gnashing of teeth”

Friday, November 14, 2014

G20, the Financial Stability Board does not know what it is doing, or is simply hiding a monstrous regulatory mistake.

“In Washington in 2008, the G20 committed to fundamental reform of the global financial system. The objectives were to correct the fault lines that lead to the global crisis and to build safer, more resilient sources of finance to serve better the needs of the economy”

That is how FSB on November 14, 2014 introduces its report to the G20 leaders titled “Overview of Progress in the Implementation of the G20 Recommendation for Strengthening the Financial Stability

And the letter that accompanies it states: “The job of agreeing measures to fix the fault lines that caused the crisis is now substantially complete.” 

But the sad fact is that the report does not even mention what in my opinion constitutes the most important fault line, and in not doing so, makes it also impossible for banks to serve the needs of the economy.

As I see it that "fault line" was the Perceived Credit Risk Weighted Equity Requirements for Banks. Here follows my explanation:

Banks already clear for perceived credit risks (in the numerator) by means of interest rates, size of exposure and other terms of contract.

And so, when regulators cleared for the same perceived risks in the equity (more risk more equity – less risk less equity) they allowed banks to earn much higher risk adjusted returns on equity when lending to those perceived as “absolutely safe”, than when lending to those perceived as “risky”

The following are some examples of risk weights and leverages based on the original 8% equity requirement and that are indicated in the Basel II approved in June 2004.

Infallible sovereigns: zero percent RW, allowing infinite leverage.

Members of the AAAristocracy: 20 percent RW, allowing a leverage of 62.5 to 1.

Financing of houses: around 25 percent RW, allowing a leverage of 50 to 1

Medium and small businesses, entrepreneurs and start-ups, and citizens: 100 percent RW, allowing a leverage of 12.5 to 1.

And there is a perfect correlation between the troubled bank assets that caused the crisis, and the presence of ultralow capital requirements.

And this monumental distortion in the allocation of bank credit is not even mentioned.

Either the FSB has not understood the problem, or it is hiding the truth about this horrendous regulatory mistake.

And even from the perspective of medium term stability of banks, these regulations are absolutely useless. That is so since all really serious bank crises never result from excessive exposures to what is perceived as risky, but always from excessive exposures to what has erroneously perceived as “absolutely safe”. And so, if anything one could even argue the equity requirements should be totally the opposite, higher for what is perceived as “absolutely safe” and lower for what is perceived as “risky”. 

And these risk weighted equity requirements are impeding bank credit from reaching where it is most needed and therefore wasting all the liquidity support provided by QEs and similar programs.

Yes regulators will tell you that Basel III has the Leverage Ratio which is not risk-weighted. What they do not understand though is that raising the floor, only increases the pressure of those living close to the roof... namely "the risky".

Bank regulators who as we all have prospered thanks to the risk-taking of the banks of our parents, are now negating that risk taking to our children.

As a consequence our banks are now not financing the risky future, only refinancing the safer past.

Risk taking is the oxygen of development, and these regulators have no right whatsoever to believe with astonishing hubris they can be the risk-managers of the word, and go behind our back, calling it quit, and so making our economy stall and fall.

Conclusion: Basel III has NOT fixed the distortions in the allocation of bank credit. In some ways it has even made it worse. And, to top it up the risk-adverse regulatory monsters also want to go after the insurance sector.

God make us daring!

Monday, November 10, 2014

20% credit risk weighted total loss-absorbing capacity (TLAC), is an assassination of the real economy

Mark Carney of the Financial Stability Board has just mentioned the possibility of 20% credit risk-weighted total loss-absorbing capacity for banks TLAC.

That, when lending to for instance one of the AAAristocracy who carries a risk weight of 20%, means the bank would need to hold 4% in TLAC.

But, when lending to a small business, which carries a risk weight of 100%, then the bank would need to hold 20% in TLAC... 5 times more! ...16% more!

This will of course mean that banks will lend too much to “the infallible” at too low interest rates, and never more to small businesses and other “risky” unless at extremely high relative interest rates.

That means in effect an assassination of the real economy

Why do bank regulators deny their children the risk-taking by banks that benefitted them?


And the price for achieving that by discriminating against the "risky", will foremost be paid by the poor, increasing the inequalities. Good job!

Sunday, November 9, 2014

The poor, “the risky” and the future are subsidizing the bank borrowings of “the absolutely safe”. Now how about that?

Governments guarantees to help bank creditors if banks fail, which in all essence is a support subsidy to the banks.

And, if banks fail, and government needs to pay up, it is argued that it is the taxpayers who must pay… and we usually leave it at that. 

But, when taxpayers pay, it is actually all who pay, and that means, in relative terms, especially the poor; because the wealthy have more deposits in the banks which are saved; and because the poor would probably be the one most to benefit with the taxes that could be collected, if the support subsidy was not needed to be paid.

But regulators also allow banks to hold less equity when lending to those from a credit point of view perceived as absolutely safe, than when lending to those perceived as risky; and that signifies that the support subsidy is effectively bigger for those perceived as absolutely safe than for those perceived as risky.

Finally, what has already made it, namely the history, has a lot more possibilities of being perceived as absolutely safe, than what needs an opportunity to be, namely the future.

All that translates into that the poor, those perceived as "risky" and the future, are subsidizing the bank borrowings of the “absolutely safe”… now how about that? And, if that is not a cruel way of fostering inequality, what is?

Friday, November 7, 2014

Is the Independent Evaluation Office (IEO) of the International Monetary Fund (IMF) independent enough?

In October 2014, the Independent Evaluation Office of the International Monetary Fund presents a report titled: “IMF responses to the financial and economic crisis: An IEO Assessment

And it does not mention what I am convinced is the primary cause of the 2007-08 crisis; and also what most obstructs our way out of it. 

I refer to the Basel Committee for Banking Supervision’s credit-risk-weighted capital/equity requirements for banks.

These allowed banks to hold assets perceived as “absolutely safe” against extremely small capital (equity) requirements, which translated into extremely high leverages of equity (62.5 times to 1 and more). 

That allowed banks to earn much higher expected risk-adjusted returns on equity when lending to what was perceived as “absolutely safe” than when lending to what was perceived as “risky”, which translated, naturally, into dangerously high exposures to what was perceived as absolutely safe”.

And any simple observation of the crisis makes clear the direct relation that existed between bank assets in problem, and bank assets with low risk-weights. For instance: i. AAA rated securities backed with mortgages to the subprime sector in the US. ii. Real estate backed financing, like that in Spain. iii. Loans to “infallible sovereigns”, like to Greece.

And we have not been able to get out of that crisis because banks still need to hold much more equity when lending to what is perceived as “risky”, like to medium and small businesses, entrepreneurs and start-ups… and that has of course impeded the liquidity provided by central banks to reach where it is needed the most.

And this regulatory risk aversion that so much distorts the allocation of bank credit to the real economy, and is dooming our economies to stall and fall, is not even part of the IMF discussions on what to do.

And so those criticizing IMF for “austerity” are not addressing the worst one of these, namely the risk-taking austerity regulatory virus that has invaded our banks... slaying the animal spirit of our economies.

And so how do you think I feel about IEO. I have to doubt its real independency… I must suspect it is also into the pockets of a groupthink incapable of understanding, or not daring to consider the possibility that bank regulators could have been so utterly mistaken. Not daring to lay the blame for the crisis more on regulators than on the bankers.

It is in bank regulations, where the animal spirit is being slayed, where Keynes is most needed

John Maynard Keynes argued: One family whose breadwinner loses a job can and should cut back on spending to make ends meet. But everyone can’t do it at once when there’s generalized weakness because one person’s spending is another’s income.

But the same goes for risk-taking. The risk-taking by the few creates the opportunities for the many. In other words, nothing can be as risky as excessive risk-aversion.

Unfortunately bank regulators, with their credit-risk-weighted capital/equity requirements, have effectively instructed banks:

“Stop taking the risk of financing the ‘risky’!”… the medium and small businesses, the entrepreneurs and start ups… 

“Finance only the ‘infallible’!”… the sovereigns, the housing sector and the AAAristocracy.

Keynes stated: “If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.”

And so today, it is clearly in the Basel Committee for Banking Supervision, in the Financial Stability Board and in the IMF where Keynes is most needed; in order to demolish the obstacles that distort the normal risk-taking that should take place in our banks.

Tuesday, November 4, 2014

If children are evaluated better for safe piano playing than for risky sports, could that lead to a weaker society?

I ask that because, with respect to our banks, with their credit risk weighted equity requirements, bank regulators are giving banks much more incentives to dedicate themselves to financing what is ex ante perceived as absolutely safe, usually the past, than to explore the financing of what is perceived as risky, usually the future… and I have absolutely no doubt that a weaker and less sturdy real economy must result.

Current regulators looking to castrate of at least to de-testosterone our banks, have no idea what dangers they are creating for our economy and our society.

We need bank regulators to stop discriminating against the fair access to bank credit of those ex ante perceived as "risky", like the medium and small businesses, the entrepreneurs and start-ups.

We need bank regulators to stop favoring the access to bank credit of those perceived as "safe", like the "infallible" sovereigns, the house buyers and the members of the AAAristocracy.

And we need our banks to have more equity... not to make them less risky... but to allow them take more risks.

Monday, October 27, 2014

The Basel Committee's Bank Stability Decree (scary eh?)

WE THE BANK REGULATORS we believe that even though those who are perceived as risky, like the medium and small businesses, the entrepreneurs and start-ups, already have to pay higher risk premiums and get smaller loans than those perceived as absolutely safe, that does not suffice in order to keep our banks safe. 

And so we, the Basel Committee for Banking Supervision, with the full support of the Financial Stability Board, in order to guarantee the stability of all our banks, and so that these do not pose a threat to our economies, decree the following: 

To make absolutely sure banks do not lend to the risky, we allow banks to hold much much less capital (meaning equity) against exposures to the infallible, like good sovereigns, housing finance and members of the AAAristocracy.

Brief explanation: That should permit banks to obtain much much higher risk adjusted returns on their equity when lending to the infallible than when lending to the risky and, being bankers greedy, that should take care of it! And so sorry if that kills equal opportunities and drives inequality, but, as they say, you can't have the cake and eat it too.

Note: To those wondering about how this regulation might distort the allocation of bank credit to the real economy, perhaps so much that in the medium and long term it could even cause great dangers for the stability of banks, we remind them that is of no concern to us bank regulators… and besides… après nous le deluge!


(My own ps. to bank regulators: Never forget that risk-taking, and blissful-ignorance, are two prime drivers of economic growth and development and that, without these, our world will stall and fall.)

Sunday, October 26, 2014

I am sure that for Europe’s young unemployed, all 123 European banks failed EBA’s and ECB’s stress tests… dramatically.

So now the European Banking Authority (EBA) has announce the stress test of 123 European banks… and we are informed that 12 failed. Bullshit! They all have failed. 

For instance, ECB's Vitor Constancio says “the vast majority of banks proved resilient”… and I just have to ask him… What’s good about a resilient bank that completely fails to intermediate credit correctly? ... or, as John Augustus Shedd (1850-1926) so well phrased it: “A ship in harbor is safe, but that is not what ships are for.”

It is not what’s on the balance sheets of the banks of Europe that should most concern us… it is what has been condemned by bank regulators from being on the balance sheets of banks in Europe that should really make us tremble… namely all the loans to medium and small businesses, entrepreneurs and start-ups. 

And that so extremely risky prohibition to take risks, that which has effectively castrated European banks, was imposed by the regulators, by means of their so tragically unwise credit risk weighted capital (meaning equity) requirements for banks.

And, to top it up, that will not make our banks safer in the long term... since there have never ever been major bank crises which have detonated because of excessive exposures to what, ex ante, was perceived as risky, as these have always resulted from excessive bank exposures (against too little bank equity) to what was, ex ante, perceived as absolutely safe.

NOTE: I am a happy husband, father and grandfather, with no scandalous past. 

I have a long and quite successful carrier as a financial and strategic private and public sector consultant and, in 2002-2004, I was an Executive Director at the World Bank. 

I have studied in Sigtuna SHL Sweden, Lund University, IESA Caracas, London Business School and London School of Economics. 

Since 1997 I have published over 800 Op-Eds in some of the most important newspapers in Venezuela. 

I have had many letters and articles on banking regulations published around the world. And few can claim having warned in such precise terms about the impending banking disasters as I did between 1997 and 2007. 

And I stake all my professional reputation, and the loving trust my family has shown me over the years, on the fact that current bank regulators of the Basel Committee, and of the Financial Stability Board, have been wrong. Not a pardonable 15 degrees wrong, but an unpardonable 180 degrees totally wrong.


What "market triumphalism" are you referring to Professor Michael Sandel?

Michael Sandel, in “The Art of Theory Interview” refers to: 

“a tendency, over the past three decades, of economics to crowd out politics. This has been an age of market triumphalism. We’ve come to the assumption that markets are the primary instruments for achieving the public good.”

And that is a much distorted, and quite often a very interested version of what is actually happening.

Over the last few decade banks, instead of allocating their credit based on adjusting to the perceptions of credit risk, by means of the interest rates (risk premiums), and the size of their exposures, have also had to adjust those credits to capital requirements (meaning equity requirements), and that are also based on the same ex ante perceived credit risks.

“More risk more equity – less risk much less equity” has translated into banks earning much higher risk adjusted returns on equity when lending to “the infallible” than when lending to “the risky”. 

For instance, a bank, according to Basel II, when lending to an infallible sovereign, can hold zero equity but, when lending to a citizen, it has to have 8 percent of equity.

That means banks can leverage their equity 12.5 times to 1 lending to citizens while not even the sky is the limit when lending to their sovereign. 

Professor Sandel, what on earth has that do with "market triumphalism"? It has all to do with an obnoxious non-transparent triumph of government powers.

And the credit risk aversion introduced by bank regulators, effectively blocks "the risky" from having fair access to bank credit, and thereby impedes equal opportunities and promotes inequality.

Is this all a conspiracy of some mighty self declared "infallible", against us their declared "risky" citizens?

It looks like we honest citizens again need to take refuge in a Sherwood Forest, in this case among the trees making a living in the world of shadow-banking. Hell, they are now even trying to convert our Robin Hood into a Sherif of Nottingham tax-collector for King George.

Saturday, October 18, 2014

Janet Yellen, are you really so unaware you are also one of the equal opportunities killers?


“Owning a business is risky, and most new businesses close within a few years. But research shows that business ownership is associated with higher levels of economic mobility. However, it appears that it has become harder to start and build businesses. The pace of new business creation has gradually declined over the past couple of decades, and the number of new firms declined sharply from 2006 through 2009… One reason to be concerned about the apparent decline in new business formation is that it may serve to depress the pace of productivity, real wage growth, and employment. Another reason is that a slowdown in business formation may threaten what I believe likely has been a significant source of economic opportunity for many families below the very top in income and wealth.” 

Unbelievable! Janet Yellen, even though she is extremely connected to bank regulations, seems not to have the faintest idea of how these effectively block the creation of new businesses, by unfairly discriminating the access to bank credit of those who are perceived as risky… like new businesses. 

Janet Yellen (and others at the Fed), let me explain it for you: 

The pillar of current bank regulations is credit risk weighted capital (equity) requirements for banks… more-perceived-credit-risk more equity – less-perceived-credit-risk less equity. 

And that translates into banks being allowed to earn much much higher risk adjusted returns on equity when lending to the “absolutely safe” than when lending to the risky” 

And that translates directly into that those who are perceived as “risky”, like new businesses, and who, precisely because they are perceived as “risky”, already have to pay higher interests and have lesser access to bank credit, will then have to pay up twice for that perception…and so will then need to pay even higher interests and then get even less access to bank credit. 

And that is odious discrimination, a great driver of inequality… and a killer of the equal opportunities the poor so much need in order to progress. 

And of course, let us not even think of what the Fed’s QE’s have done in terms of un-leveling the playing fields. The fact is that had it not been for how the financial crisis management favored foremost those who had most, Thomas Piketty’s "Capital in the Twenty-First Century”, would have remained a manuscript. 

And Janet Yellen thinks: “it is appropriate to ask whether this trend [of widening inequality] is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity.” 

Frankly to hear someone who favors regulatory risk-aversion, daring to speak about American values, in the “home of the brave”, in the land built up on the risk-taking of their daring immigrants… is sad.




PS. To me it is amazing how bank regulators in America can so blitehly ignore the Equal Credit Opportunity Act (Regulation B)

Thursday, October 16, 2014

How could our bank regulators have fallen for our bankers’ so childish and selfish arguments?

We all know Mark Twain’s saying about bankers wanting to lend you the umbrella when the sun shines and wanting it back as soon as it looks like it is going to rain. Of course bankers are risk-adverse… aren’t most of us?

But suddenly bankers discovered that bank regulators were even more risk-adverse than they were (most probably because that is a pre-requisite to become a regulator) and decided to exploit that.

And so they went to the Basel Committee, the Financial Stability Board, the Fed, and for good measure to the IMF, and argued the following:

"You know taking risks tempts us very much, because doing so we can earn those higher returns on equity that make our shareholders happy and keep us in our jobs. But that can, unfortunately, turn out very bad for us… and, consequentially, very bad for you, since then many could rightly argue you are not performing your duties as regulators.

And so here is what we propose: If you allow us to hold much lower equity for what is ex ante perceived as absolutely safe, from a credit point of view, than what we must hold against what is perceived as risky, then we will be able to earn much higher risk-adjusted return on equity on what is absolutely safe… and so we do not need to go to where it seems risky... and so we, and you ,will all be able to live our happy risk-free ever after."

In essence that was like some children convincing their parents that they should be rewarded with ice cream if they ate up the chocolate cake, and punished with having to eat spinach if they dared to eat up their broccoli.

And since bank regulators fell for it, now banks have dangerously overpopulated “safe havens” like the infallible sovereigns (Greece), the AAAristocracy (securities collateralized with mortgages to the subprime sector) or real estate (Spain)… and have equally or even more dangerously, left “risky” bays unexplored, by withholding credit to medium and small businesses, entrepreneurs and start-ups.

Just like if the children had been able to convince their parents, they would now be obese after gorging on fats and carb, and not having any of those fibers, proteins and vitamins they like much less.

And the Western World, built among others upon a lot of risk-taking by banks, is now stalling and falling… and no one seems too concern about this regulatory risk-aversion.

And, because of the less importance of equity, and therefore of shareholders, the bankers also, by means of the bonuses they award themselves, been able to stay with a much larger share of the profits.

So, now you tell me, who has been the dumb and dumber of all this? The bank regulators… or we who trusted them blindly?

Tuesday, October 14, 2014

Why Europe should be scared having the ECB, under Mario Draghi, being the supervisor of its 120 most significant banks.

Why?

Because Mario Draghi, as the former chairman of the Financial Stability Board either likes it, or has not understood that: 

If you allow banks to have much lower capital (equity) when holding, from a credit risk point of view only, "absolutely safe" assets than when holding "risky" assets; then you allow banks to earn much higher risk adjusted returns on equity on assets perceived as “absolutely safe” than on assets perceived as “risky”… and then banks will lend too much at too low interests to those perceived as “absolutely safe”, and too little at too high interests to those perceived as “risky”, namely the medium and small businesses, the entrepreneurs and start-ups…namely, as they say, those tough risky risk-takers Europe most needs to get going when the going gets tough.

And, for more clarity, because Mario Draghi is not capable to understand that secular stagnation, deflation, mediocre economy and all similar obnoxious creatures, are direct descendants of silly risk aversion.

And, for more clarity, because Mario Draghi does not understand that Europe was built up with risk-taking and that, without it, it will fall and stall.

Just look now at the ECB doing all its expensive “Comprehensive Assessment of all significant banks in the euro area by the ECB”, and worrying exclusively about not finding anything risky on bank’s balance sheets, and not one iota about all those loans that should be there, had it not been for this sissy and odious discrimination against what is ex ante perceived as risky. 

As you see Europe, Mario Draghi is really dangerous for your future. And especially so if you are young and about to run the risk of belonging to a lost generation.

Now if you are a European just concerned with making it a couples of months, or perhaps some few years more down the line, because you subscribe to the philosophy of “après nous le deluge”, then keep Mario Draghi, because then he really is your man.

PS. Europe, keep an eye open on Stefan Ingves, the chair of the Basel Committee, and on Mark Carney, the current chair of the Financial Stability Board... they are just as dangerous.

Monday, October 13, 2014

Bank regulators regulate based on the safety needs of the very old, and not on the risk-taking needs of the young.

On October 13 2014, in the International New York Times, Mary Williams Walsh, in “No smoke no mirrors” analyses comprehensibly the pension plan in the Netherlands.

And therein she writes that, after seeing what the financial crisis had done to the pension accounts: “Dutch young people found their voice. No matter their employment sector, they could see that their pension money was commingled with retirees’ money…[and] they realized that they and the retirees had fundamentally opposing interests. The young people were eager to keep taking investment risk, to take advantage of their long time horizon. But the retirees now wanted absolute safety, which meant investing in risk-free, cashlike assets. If all the money remained pooled, young people said, the aggressive investment returns they wanted would be diluted by the pittance that cashlike assets pay.”

Mary Williams Walsh describes precisely what should be the objection of all young people around the world to current bank regulations, but that the young, unfortunately, have not yet discovered.

The pillar of current bank regulations, is credit risk-weighted capital (equity) requirements for banks… in short more perceived credit risk more equity, less perceived risk less equity. 

And that causes banks to be able to earn much higher risk adjusted returns on assets perceived as “absolutely safe” than on assets perceived as “risky”… which leads banks to not financing the riskier future, but only to refinancing the safer past.

And given that risk-taking, not risk aversion, is what took the western world economies to become what they are, without it, they are bound to stall and fall.

And if that is not dumb short-termish regulations, which might perhaps benefit some of those baby-boomers sooner to pass away, but certainly hurt the young who risk becoming a lost generation, I do not know what is.

It would be great if the young Dutch kids also opened their eyes on this issue, and started a revolt against the banks being all castrated.

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

Secular stagnation, deflation, mediocre economy and all similar obnoxious creatures, are direct descendants of silly risk aversion.

Banks need to be regulated more in the interests of the advancees than in the interest of the retirees.

Mario Draghi, Stefan Ingves, Mark Carney, Jaime Caruana and other bank regulators, you should be ashamed


Thanks to theirs and other regulators’ credit risk weighted capital requirement for banks, the risks your banks now take, are that of dangerously excessive exposures to what’s deemed as “absolutely safe”; not the true risk-taking the economy needs; and, as a consequence, Europe, which was constructed upon true risk-taking, is now stalling and falling… and its youth condemned to be a lost generation.

You young Europeans, if you want to have a chance of a better world, or a least of a not too much worse world, then go tell your regulators to immediately stop basing their capital requirements for banks on some purposeless credit risk ratings, those which are already considered by banks; and to use instead creation-of-jobs-to-young-people ratings, sustainability of planet earth ratings, and, when lending to sovereigns, ethics and good governance ratings.

Tell them that they should know that secular stagnation, deflation, mediocre economy and all similar obnoxious creatures, are direct descendants of excessive risk aversion

Before blaming any regulatory capture on bankers, look first to the parents of central bankers and regulators.

That is because the regulatory capture could very well begin with some overly sissy parents, whose risk-adverseness causes the risk aversion in their kids which makes them natural candidates to be central bankers and regulators.

And then their grown-up equally scared kids, prohibit banks from engaging in natural market risk-taking, like lending to entrepreneurs and start-ups. 

And that risk-adverseness takes the strength out of the real economy, and, at the end, only causes banks to take truly dangerously excessive risks on what regulators, with amazing hubris, consider themselves to be capable to deem as “absolutely safe”… like the infallible sovereigns (Greece), the AAAristocracy (securities collateralized with mortgages to the subprime sector) or real estate (Spain).


Sunday, October 12, 2014

“Too defined and too encompassing to go wrong regulations” is riskier than “Too big to fail banks”

Mark Carney the Chairman of the Financial Stability Board, in his Statement delivered to the International Monetary and Financial Committee Washington, DC, 11 October 2014, makes no reference whatsoever to the distortions credit risk-weighted capital requirements have in the allocation of bank credit to the real economy. 

And so Carney at least, evidences he has not learned anything from this crisis, or that he absolutely agrees with the idea of banks dangerously overpopulating safe havens and withholding completely from exploring any riskier though perhaps of us more productive bays. 

As you can read, still not one single word about the purpose of our banks… banks just standing there, without any other purpose, seems perfectly all-right to him. 

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

Mark Carney also refers to the fact that one of the goals of the Basel Committee is to set out its plan to address excessive variability in risk-weighted asset calculations. He seems still not able to understand that, the lack of variability in risk-weighted asset calculations, by leveraging the consequences of errors made in their calculations, is also a possible horrendous source of systemic risk.

Really how can someone worrying about too big to fail banks, simultaneously preach a one set of can’t go wrong regulations? What’s the difference between too big to fail banks and too defined to go wrong regulations?

In short Mark Carney, and the rest of regulators out there, have not been able to understand that even if their risk-weights are based on perfect risk perceptions, applying these to bank capital requirements is wrong, because these “perfect” risk perceptions should already be cleared for banks in the interest rates, in the size of the exposures and in the other terms that apply.

Mark Carney…and you other regulators out there… stop being so stubborn… you should not concern yourselves with the risk of bank assets, which is the concern of bankers. You instead must concern yourselves with the fact that the banks could perhaps not manage those risks… something that, as they say here in Paris, is pas la meme chose. 

You regulators you do not solve anything for us managing the risks of banks because you yourself then become our largest systemic risk with banks… and, I am sorry, but, I at least, see absolutely no reason to trust some central bankers to know what risks should or should not be taken out there in the real world, for my grandchildren to have a great future. And much less so when you all, with your Basel II, have already proven yourself to be huge failures.

Sincerely I find your hubris of believing yourself capable of being the risk managers of the world quite disgusting. 

Look around you… I would hold that capital requirements based on potential of job creation ratings, sustainability of planet earth ratings, and good governance and ethics ratings of governments, though distorting, would do so in a better directions than your credit ratings, which in fact promotes inequality and exclusion.

Saturday, October 11, 2014

World Bank and IMF, is the stability of banks really a good growth (or stability) strategy?

The most important “New Growth Strategy” that has been put in effect by global authorities during the last decades, is the one based on the notion that as long as our banks are stable, the economy will grow and everything will be fine and dandy.

And, in order to foster that stability of the banks, the Basel Committee for Banking Supervision designed a system of ex ante perceived credit-risks weighted capital (equity) requirements, which translates into: more-risk-more-equity, less-risk-less-equity. 

And that allows banks to be able to earn much much higher risk-adjusted returns on equity when lending to “the infallible” than when lending to “the risky”.

And, of course, the result was just as could have been expected… huge exposures to the infallibles, like to AAA rated securities (subprime mortgages USA), sovereigns (like Greece) and real estate (Spain)… and no exposures at all to the risky, like to medium and small businesses, entrepreneurs and start ups.

So how has that strategy worked? I would dare say “quite lousily”… but I might be wrong… because I see most of you feel like it is ok for those responsible for Basel I and Basel II, to now have a go at Basel III, that is if they are not to take up even higher responsibilities, like that of chairing the ECB.

I have always thought that risk taking was the oxygen of development, and that secular stagnation, deflation, mediocre economy, unemployment, underemployment, managed depression and all similar obnoxious creatures, were all direct descendants of risk aversion. But, then again I might be wrong, especially considering that the world’s premier development bank, has not objected one iota to that artificial regulatory risk aversion 

Looking back at history I have also always thought that what really posed dangers to the stability of banks, was what is perceived ex ante as absolutely safe. That because there is were the real dangerously large exposures could be found, never among the risky, But, then again I might be wrong, especially considering that the world’s premier financial stability agent, has not objected one iota to that structure of incentives for the allocation of the portfolios of banks.

It will be very interested to hear what renowned experts like Andreu Mas-Collel, Dani Rodrik, Philippe Aghion, Arvind Subramanian, Ivan Rossignol will have to say about that when, on October 14, they discuss in Washington: “New Growth Strategies: Delivering on Their Promise?” Sorry I can't be there (well not that sorry, since I will be in Paris :-))

PS. And, while you’re at it, if you can spare a second, give a thought to whether the risk-weighted bank capital requirements are helpful in order to decrease inequality or financial exclusion… or if perhaps they may serve as drivers of that.

PS. And, while you’re at it, if you can spare a second, give a thought to whether injecting some purpose into bank capital requirements could do some good, like instead of using credit ratings, using perhaps potential of job creation ratings, sustainability of planet earth ratings, and good governance and ethics ratings of governments.