My tweets on what the coronavirus should inspire in the USA

Coronavirus inspires:

Immediate elimination of all US health sector discrimination in price, access or quality, between insured and uninsured

As is all get the short end of the stick of non-transparent deals between insurance companies and health sectors

https://teawithft.blogspot.com/2009/06/but-there-is-minimum-minimorum-reform.html

The elimination of risk weighted bank capital requirements that so dangerously distort allocation of credit in favor of sovereign and “the safer”, thereby disfavoring “the risky”, the always so much needed, and so much credit needing, SMEs / entrepreneurs

http://subprimeregulations.blogspot.com/2019/07/risk-weights-are-to-access-to-credit.html

It marks a beautiful opportunity to introduce an unconditional universal basic income UBI, a citizens’ dividend, that could be funded with high carbon taxes and a tax on the advertising revenues derived from exploiting the citizens’ personal data.

http://myubi.blogspot.com/2017/01/my-universal-basic-income.html

My Fourth of July 2019 tweets to the United States of America

This Fourth of July 2019 here are two tweets in which I expressed, to that United States of America that I admire and that I am so grateful to, some very heartfelt concerns.

In 1988 America signed on to the Basel Accord’s risk weighted capital requirements for banks. 

These gave banks huge incentives to finance what was perceived as safe, and to stay away from the “risky”. 

It is so contrary to a Home of the Brave, opening opportunities for all.

And regulators decreed risk weights: 0% sovereign, 100% citizens

That implies bureaucrats know better what to do with credit than entrepreneurs

That has nothing to do with the Land of the Free, much more with a Vladimir Putin’s crony statist Russia

http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html

PS. Why “grateful”? Had my father, a polish soldier not been rescued by American’s from a German concentration camp April 1945, I would not be.

PS. As one of those millions Venezuelan in exile, I know my country’s future much depends on America’s will to support its freedom.

If I had been elected a first time EU parliamentarian

If I was a newly elected first time European Union parliamentarian, the following is what I would ask in order to leave a clean historical record of my presence there:

Fellow parliamentarians: I have heard rumors that even though all the Eurozone sovereigns take on debt denominated in a currency that de facto is not their own domestic printable one; their debts, for the purpose of the risk weighted bank capital requirements, have been assigned a 0% risk weight by European authorities. Is this true or not?

If true does that 0% risk weight, when compared to a 100% risk weight of us European citizens not translate into a subsidy of the Eurozone sovereigns’ bank borrowings or in fact of all Europe's sovereigns?

If so does that not distort the allocation of bank credit in the sense that the sovereigns might get too much credit and the citizens, like European entrepreneurs, get too little? And if so would that not signify some regulators, behind our backs, have imposed an unabridged statism on our European Union?

And if so, does that not mean that some Eurozone sovereign could run up so much debt they would be seriously tempted to abandon the euro and thereby perhaps endanger our European Union?

Finally, was Greece awarded such a 0% risk weight? If so was this monumental fault by EU authorities taken in consideration when restructuring its debts? And if not, does that not show a basic lack of solidarity with a EU member?

Who should answer these questions? The European Commission?

Oops... it seems that it was the European Parliament through a "Council on prudential requirements for credit institutions and investment firms" that concocted the  idea.

PS. In March 2015 the European Systemic Risk Board (ESRB) published a report on the regulatory treatment of sovereign exposures. In the foreword we read:

"The report argues that, from a macro-prudential point of view, the current regulatory framework may have led to excessive investment by financial institutions in government debt. 

The report recognises the difficulty in reforming the existing framework without generating potential instability in sovereign debt markets. 

I trust that the report will help to foster a discussion which, in my view, is long overdue. Mario Draghi, ESRB Chair"

So Mario Draghi, as president of the European Central Bank since 2011, what have you done about it, or is it your intention to leave that very hot potato to your successor?

PS. In that ESRB report there are references to "domestic" currency but not to the fact that the euro is not really a domestic currency of any of the eurozone sovereigns. 

A brief comment on Joseph E. Stiglitz “The EURO: How a common currency threatens the future of Europe”

Professor Stiglitz correctly describes many of the challenges the Euro poses, most of which were known from get-go twenty years ago, like the problem derived from having fixed exchange rates within the Eurozone.

In the introduction to the paperback edition, Stiglitz also briefly brings forward something that should have been understood but seems to have been much ignored. That is that although the Euro is for most purposes the domestic currency in the Eurozone, it is de facto not a truly domestic currency for any of its sovereigns, since none of these have the right to individually print the Euros it wants or needs. Without that right, the Eurozone’s sovereigns’ debts are all, de facto, denominated in a quasi-foreign currency.

But what the book does not mention, is what came afterwards, I do not know exactly where and when; something that here and there is referred to, in hush voices, as Sovereign Debt Privileges. These translate into that the EU authorities (European Commission?), for the purpose of the risk weighted capital requirements for banks, assigned all Eurozone nations an insane 0% risk weight. 

That distortion in favor of Eurozone’s sovereign’s accesses to bank credit has impeded the markets from sending the correct market signals with respect to the interest rates for each sovereign.

One of the consequences of this has been the tragedy of Greece. Especially since Greece was then forced up to pay up basically on its own for this EU mistake, so as to bail out German, French and other Eurozone banks. What a Banana Union!

As for Professors Stiglitz opinions on Brexit I might resume those I my own words as “If there's a Remain there might not be a EU in which to remain”, something that would be very sad as EU was, and still can be, a very beautiful dream.

But let me be clear. I do not hold the EU authorities as solely responsible for the consequences of their 0% risk weighing of the Eurozone Sovereigns. Already in 2011, in a post titled “Who did the Eurozone in?” I argued that the extraordinary low risk weights that the Basel Committee assigned to sovereign debt when compared to what it assigned to the private sectors would end in tears. (And that goes not only for the Eurozone)

The statist Basel Accord should be anathema to the American Constitution.

Charles Krauthammer once wrote the American Constitution “stands for the pillars that define a limited government with enumerated powers, whose mission is to preserve liberty and individual rights”, “The enduring miracle of the American Constitution”, Washington Post, November 30.

In 1988, one year before the Berlin wall fell and so many thought the world had freed itself from communism, America, and much of the developed world, signed up on the Basel Accord. That accord, for the purpose of its risk weighted capital requirements for banks, awarded the sovereign a 0% risk weight, while imposing one of 100% on unrated citizens.

If Krauthammer is right when he wrote of a reverence for the Constitution “so deeply ingrained that we don’t even see it; we just think it’s in the air that we breathe”, I cannot understand the American silence on what clearly is a statist concoction; which I believe goes against everything America and its Constitution stands for.

That seriously distorted the allocation of bank credit in favor of governments and has now painted America into a very dangerous corner; in 1988 America’s public debt was about $2.6 trillions, now it owes around $21.7 trillions and still has a 0% risk weight.

@PerKurowski

Jeff Fairburn’s £75m bonus is nothing when compared to the real problem with house prices.

Aditya Chakrabortty holds that “Jeff Fairburn’s £75m bonus has sharpened focus on the vast windfalls generated by help to buy” “Let’s stop lining housebuilders’ pockets and tax them instead” The Guardian, November 9, 2018.

No, it clearly has not! By focusing on that bonus, which naturally stirs up some envy into all of us, he misses the real issue, namely how much helping houses to be affordable for some, makes these even more unaffordable to others.

So first, let us all shake off that Jeff Fairburn’s £75m bonus. To begin with just take it as if life had dealt him a lottery jackpot. He has most certainly paid much more taxes on it than the taxes that would be paid had that £75m bonus been shared out equally among us all. And I would bet that more than 99% of what purchase power he had left over, has already been returned to the real economy by him buying assets or services.

That “the five biggest British housebuilders together paid out £4.4bn in dividends to shareholders between 2014 (the first full year of help to buy) and 2017” is totally irrelevant when compared to the magnitude of the real problem with houses.

That problem has to do with how much house prices have been inflated by this scheme and so many other distortions; especially like regulations that allow banks to hold much less capital when financing the purchase of houses than when lending to entrepreneurs… those who could be the ones who create the jobs so that house buyers will be able to afford to pay their mortgages and utilities.

Aditya Chakrabortty laments “Without that money from you and me, Persimmon would simply not have made that many sales, nor made that much profit– and its outgoing boss probably wouldn’t have got such a large bonus.” He should look at himself first.

Does Aditya Chakrabortty own a house? Then he should reflect on how much his house has gone up in value because of all the political kindness awarded house buyers. Should he not pay high taxes on that? House builders at least built. What have house owners done to enrich themselves so?

Does Aditya Chakrabortty not own a house? Then he should reflect on how much all the political kindness awarded house buyers has made houses even more unaffordable to him.

Houses are no longer homes; as a consequence of all regulatory and political kindness these have become investments assets too. The day too many house-owners will want to cash in their investment, for instance to pay some retirement costs… will the buyers be there for them? 

Well if we prohibit all political kindness awarded house buyers… as we in fact should so as not to blow the bubble larger, then many if the current buyers will definitely not be there... but then those that do not own houses may begin to find these affordable.

It all makes me remember Alan Price’s “Oh my, my, my, my, my, my, my, it makes you wanna cry. This is the house that Jack built, baby, and it reaches up into the sky”

Five tweets and four PS: When shares and houses will want or need to transition from here to there, what will happen?

Huge QE, large fiscal deficits, and generous bank credit pushed on by very low capital requirements, injected huge amounts of liquidity that, among others, caused the price of shares, and the price of houses that morphed from homes into investment assets, to increase immensely.

Soon many of the elderly owners of shares and houses, will want to reconvert these assets again into main-street purchase capacity, whether voluntarily, in order to cover for their retirement costs, or involuntary, by having these assets becoming part of an inheritance.

The sale of shares and houses will then face: An extremely indebted economy that includes huge unfunded social obligations. Gig jobs, robots that tend to hold down wages, and pension funds and insurance companies also needing to sell assets in order to meet their own commitments.

How is all that going to play out? Since there are no possibilities of reenacting Troubled Asset Relief Program (TARP), or placing all shares and houses on central bank’s balances, it has me very troubled and finding very little that could bring me, a grandfather, some relief.

Is someone somewhere preparing financial or economic counter measures that could alleviate the problems brewing in the horizon? I really doubt it! As Einstein said, “We can't solve problems by using the same kind of thinking we used when we created them.”

PS. All this could be further much complicated by social tensions caused by lack of employment. Therefore I would ignore all the redistribution profiteers’ natural objections, and immediately enact an Unconditional Universal Basic Income. Even $100 per month would do for a start.

PS. That UBI could be partially funded by a high tax on carbon emissions. That would allow us to use market signaling more, in order to avoid that whatever little resources we might have available for fighting climate change, are captured by green-profiteers.

PS. Bank regulators messed it up for us. Their risk-weighted capital requirements only guarantee banks building up especially large exposures, to what’s perceived as especially safe, against especially little capital, dooming bank systems to especially large crises

PS. If our descendants are to stand a chance they must understand that risk-taking is the oxygen of any development, and so they must be wary of any loony runaway risk aversion, imposed by expert besserwisser nannies. God make us daring!

Bank regulators behave like the scarer employed at the energy-producing factory Monsters, Inc.

The idea of requiring banks to hold less capital (equity) against what is perceived, decreed or concocted as safe, like sovereigns, the AAArisktocracy and residential houses, than against what is perceived as risky, like SMEs and entrepreneurs, is absolutely cuckoo.

That means that when banks try to maximize their risk adjusted return on equity they can multiply (leverage) many times more the perceived net risk adjusted margins received from “the safe” than those received from “the risky”. As a result clearly, sooner or later, the safe are going to get too much bank credit (causing financial instability) and the risky have, immediately, less access to it (causing a weakening of the real economy). 

Anyone who can as regulators did in Basel II, assign a 20% risk weight to what is AAA rated, and to which therefore dangerously excessive exposures could be created, and 150% to what is made so innocuous to our banking systems by being rated below BB-, always reminds me of those in Monsters, Inc. who run scared of the children. I wish they stopped finding energy in the screams of SMEs and start using their laughter instead.

“We need a people’s Fed”. Yes, we sure do! Assigning 0% risk weight to the sovereign and 100% to any unrated citizen is pure statist ideology driven discrimination in favor of government bureaucrats and against the people. But perhaps the activists depicted are not into that kind of arguments. 

PS. Those in Monsters Inc. finally figured it out. Our bank regulators in the Basel Committee and the Financial Stability Board have yet to do so, even 10 years after that 2008 crisis, which was caused exclusively by excessive exposures to what was perceived, decreed of concocted as safe, like AAA rated securities and loans to sovereigns like Greece 😩

Deciphering my tweet

My tweet: "A much worse debt crisis awaits us, perhaps the sooner the better, caused by having kicked the 2008 crisis can down the road, while keeping serious miss-regulation of banks. When it hits, an Unconditional Universal Basic Income, however small, might be society’s only survival tool." 

Just looking at the huge debts of all sectors, in all nations; sovereigns, corporations, house financing, student debt, credit card debt and unfunded social liabilities; that which among other converted homes into also being dangerous investment assets; and pushed the consumer and government demand that should be there to prop up the future economy to prop up the current, there's no doubt that “A much worse debt crisis awaits us.”

Since it was our generation that trusted populist besserwisser technocrats to know what they were doing, for instance when they told us “We will make your bank systems safer with our risk weighted capital requirements because we know what the risks are”, this is really our generation’s made crisis. In this respect, because we should not leave that crisis to our grandchildren to take care of, and also because we do not want that debt to grow even more, that’s why the “perhaps the sooner the better”. 

QEs or asset purchase program, ultralow interest rates and many continues fiscal deficits clearly explains the “caused by having kicked the 2008 crisis can down the road” (forward and upwards).

The risk weighted capital requirements for banks in Basel II assigned a 0% risk weight to sovereigns, a 100% risk weights to the citizens who make the sovereign strong; and allowed banks to leverage a mindboggling 62.5 times their capital with private sector assets rated AAA by human fallible credit rating agencies. That caused the crisis. As much of those distortions are still well and alive, that  should more than suffice to explain the “while keeping serious miss-regulation of banks”.

“When it hits”, that’s when all polarization and redistribution profiteers of the world, like Venezuela’s Chavez and Maduro, will be out in masses on the street trying to capitalize on the mayhem, in order to increase the value of their franchises.

And that’s precisely when and why “an Unconditional Universal Basic Income, however small, might be our society’s only survival tool.”

If only we had all understood and accepted  the benefits of a hard landing.

World Bank, more than a “Knowledge” bank, a “Besserwisser” bank, be the “Wisdom” bank I know you could be; or, if that sounds too haughty, at least aspire to be “The Common Sense” bank.

A “Knowledge” bank might think that assets perceived as risky could be risky for banks. A “Wisdom” bank understands that what could be especially risky for banks, and for bank systems, is what is perceived as safe.

A “Knowledge” bank might think that it is great for banks to avoid taking risks.

A “Wisdom” bank knows that the most important function for banks is to take intelligent risks on behalf of society.

A “Knowledge” bank might agree with the Basel Committee’s bank capital requirements based on perceived risks.

A “Wisdom” bank would think much more in terms of not distorting credit allocation, and, if that’s not possible, in terms of capital requirements for banks with a purpose, like on perceived chances of fostering human and natural capital wealth

A “Knowledge” bank, if it has to distort the allocation of bank credit, might agree with bank capital requirements against sovereigns based on credit ratings.

A “Wisdom” bank, in such a case, would much more prefer to base the bank capital requirements on a good governance index.

A “Knowledge” bank might say: “We know it all”. A “Wisdom” bank, would understand “We know Jack shit!”

Or, if aspiring to becoming the “Wisdom bank” sounds too haughty, the World Bank it should at least aspire to be “The Common Sense” bank.

"God make us daring!"

Many of our young will be without jobs, and will have to live in the basement of their parent’s houses, as a direct consequence of abominable bank regulations

Fact: The financing of house purchase is usually, with reason, perceived by bankers as much safer than financing entrepreneurs.

Fact: That means that, on their own, unregulated, banks would be expected to finance the purchase of houses more, and at lower risk adjusted interest rates, than financing entrepreneurs. 

Fact: But then bank regulators in 1988 doubled down on the same ex ante perceived risk and introduced risk weighted capital requirements. 

Fact: In those capital requirements (2004, Basel II) regulators assigned a much lower risk weight to the financing of houses (35%) than to the financing of entrepreneurs (100%).

This means regulators allow banks to hold less capital when financing the purchase of houses than when financing entrepreneurs. 

This means banks can now leverage their equity more when financing the purchase of houses than when financing entrepreneurs. 

This means banks can now obtain higher expected risk adjusted returns on equity when financing the purchase of houses than when financing entrepreneurs. 

This means that banks will even more prefer financing the purchase of houses, at even lower interest rates, than the financing of entrepreneurs.

This means easier, regulatory subsidized, access to house financing, causing higher house prices. How much of the easier  financing conditions when purchasing houses do we now have to finance when financing a house purchase?

This means a lesser, taxed by regulations, access to credit for entrepreneurs, causing less job creation and a slower growing real economy.

So, compared to what would be the case in the absence of these risk-weighted regulations this means:

For the young: Fewer possibilities of jobs and of buying their own houses. 

For house owners: They are sitting on assets that at current real valuations will not find buyers in the future.

For the aging: Lesser possibilities of taking care of their future needs.

For social peace: The young might revolt and shout: “Parents we’ve been cheated out of our future by crazy bank regulators, and you said nothing! So now you move down to the basements and we move upstairs!”

PS. Those more interested in providing our young affordable housing than in helping our young to afford the houses, which is of course not the same thing, are as I see it just some other vulgar redistribution profiteers.

PS. Here a brief aide memoire on the major mistakes with the risk weighted capital requirements

Bank regulators’ statist 0% risk weight of sovereign, turn governments into credit spoiled filthy-rich brats that will end up defaulting

If banks need to hold much less capital when lending to the sovereign than when lending to anyone else; and thereby makes it easier for the sovereign to offer banks an attractive risk adjusted return, banks will lend and governments will borrow, way too much. It is doomed to end badly.

That is what the 0% risk weight of sovereign when setting the capital requirements does. It is a shameless and dangerous regulatory subsidy of government debt which statist regulators justify based on “sovereigns can always print money”, which as we all know is precisely one of the major risks with sovereigns.

And too many experts, most, are not even aware of that regulatory subsidy, and often refer to government debt setting the risk-free rate, as if nothing had happened.

For instance, way to often we read a reputable financial commentator opining that the sovereign should take advantage of the very low rates in order to take on some needed infrastructure projects that will also provide jobs while they last. No consideration at all is given to the fact that government debt, if it does not help generate the economic growth required for its repayment is a de facto tax on future generations. Those who seem to be most in need of tax-cuts are the unborn. Why not think of them too President Trump?

What would happen if we want to retire our deposits in a bank that is overextended in loans to an overextended sovereign? Have the sovereign print money? Like any Venezuelan central bank?

This 0% risk weighting started in 1988 with the Basel Accord. During the almost 600 years of previous banking there was nothing of that sort of distortion. Imagine what financier Templar Grand Master Jacques de Molay, burned in 1307 by Phillip IV, would have to say about that 0% risk-weight. 

But what to we do now? If we imposed on banks the same capital requirements for lending to the sovereign than when lending to the citizen, which is how it should be in order for banks to allocate credit efficiently, that would create so large new capital requirements it could bring the whole ordinary bank credit function to a halt.

Let us suppose we want banks to hold 10% in capital against all assets. One alternative would be to lower the current capital requirement for banks to each banks’ current average capital, and let it thereafter build up little by little… with no dividends for quite sometime... or allowing banks to hold on to whatever current 0% risk weighted sovereign debt they have against no capital, but strictly imposing the new capital requirements on any new purchases of it.

Another tool that (thinking of my grandchildren) could be needed and effective is a haircut on all bank depositors, by forcing them receive some negotiable non-redeemable bank shares in lieu of money. (Perhaps those shares could even turn out to be a good investment for pension funds)

What Kurowski? Have you gone mad? No friends, just tell me how we otherwise stop governments, egged on by so many redistribution profiteers, from taking on subsidized debt?

PS. Be sure of it, currently Financial Communism reigns

PS. How far has the IMF has progressed researching the theme of this regulatory subsidy?

PS. The other sector that is being subsidized by low risk weights is that of residential mortgages. That will likewise signify we end up with plenty of houses for our children to live in the basements, but too few jobs for them to be able to buy their own upstairs.

PS. In 1988 when statist regulators assigned it a 0% risk weight, the US debt was $2.6 trillion. At end of 2017 it was US$20.2 trillion, and still 0% risk weighted. If it keeps on being 0% risk weighted, it is doomed to become 100% risky, just like what happened to Greece

PS. What to do? The regulators painted us all into a corner. The 0% risk weight of sovereigns will continue to dangerously doom the public debt safe-havens to become overpopulated by banks holding especially little capital. But any increase of that weight, will scare the shit out of markets.

PS. The only way to solve the 0% sovereign risk weight conundrum that I see, is to increase the leverage ratio applicable to all assets, until that level where the risk weighted capital requirement totally loses its significance.

PS. The same central bank technocrats who target a 2% inflation rate, which means that in 10 years our money will be worth about 22% less, are the ones who assign sovereigns a 0% risk weight. Why do we allow them to treat us with such statist contempt?

PS. Here is a current summary of why I know the risk weighted capital requirements for banks, is utter and dangerous nonsense.

More important than affordable houses for the young, is for them to afford houses.

A letter sent to The Globe and Mail (not published)

The Inter-American Commission of Human Rights (IACHR) has joined UN Rapporteur in recognizing Canadian Human Rights-Based Approach to Housing. When it refers to the creation of safe and affordable housing during the next 10 years for the Canadian population most in need, such as women and children fleeing family violence, seniors, persons with disabilities, those dealing with mental health and addiction issues and veterans, I cannot but concur.

But, it also makes reference to “young adults” and, in this, as a grandfather of two Canadian girls, I must raise my hand to argue that much more important than allowing the young adults affordable housing, is allowing them to afford houses.

Currently, because banks are allowed to leverage more with “safe” residential mortgages than with loans to the “risky” entrepreneurs who stand a better chance to create the future jobs our young need; and banks therefore earn higher risk adjusted returns on equity with mortgages than with loans to entrepreneurs, Canada, like all countries using the Basel Committee’s risk weighted capital requirements for banks, has put the horse before the cart.

PS. Not sent to The Globe and Mail: What would the price of a house be if there was no financing available to purchase these? Of their current price how much is represented by the intrinsic value of the house, and how much is a reflection of all one-way-or-another subsidized financing allocated to that sector? The sad truth is that our society has ended up financing the financing of houses. When all that low risk weighted mortgaging comes home to roost in a subprime unproductive economy, it will be hellish

PS. Chinese money: What’s the problem with Chinese freezing some of their wealth in Canadian real estate? What’s important is what those selling that real estate do with the money. Or not?

Research project: How much in the current house prices can be attributed to the market having priced in all preferential treatments the society has awarded the financing of houses… like the low risk weights in the risk weighted capital requirements for banks?

@PerKurowski

Fiscal waste's decades out

Some want tax cuts.

Some wants tax increases

But no one want tax spending cuts

So its the fiscal waste's decades out

But why worry when it is so easy to finance it with QEs, low interest rates and regulatory subsidies.

Regulatory subsidies? 

1988, Basel I's risk weighted bank capital requirements that decree 0% risk-weight for sovereigns and 100% entrepreneurs. 

Those absolutely no good at something, lack exactly the skill they need to know that they are no good at it. John Cleese dixit.

Monty Phyton’s John Cleese, fabulously interviewed at the Commonwealth Club by Adam Savage, the host of “Mythbusters”, and in reference to a theory by David Dunning, a professor at Cornell, says around minute 57:40 the following:

“In order to know how good you are at something requires almost exactly the same aptitude as it does to be good at that think in the first place.

Which follows, as a corollary, that if you absolutely no good at something, you lack exactly the skill that you need to know that you are no good at it.

And once you realize that, you see there are thousand of people out there that have absolutely no idea of what they are doing, and so they have absolutely no idea of that they have no idea what they’re doing.”

I wonder, could John Cleese by any chance be referring to those regulators who, when deciding on the risk weighted capital requirements for banks, assigned a meager 20% to those dangerously rated AAA, and a whopping 150% for those who rated below BB- have been made so innocous for the banking system?

Here some personal observations on those cuckoo risk weighted capital requirements for banks developed by the Basel Committee, for the world to use, God Help Us!

Could this be a theme that for some strange reason TED Talks does not like me to talk about?

How long should we allow bank regulators, like the Basel Committee for Banking Supervision and the Financial Stability Board, to feed us their dangerous and hubris filled besserwisser bullshit?

How can any system that makes it easier for those who already have it easier to access bank credit, and harder for those who already find that harder be defined as a “fairer financial system”? https://subprimeregulations.blogspot.com/2016/03/decreed-inequality.html

How can any system that risk weights with 20% the so dangerous AAA rated, and with 150% the so innocous below BB- rated, be defined as a system that fosters financial stability? https://subprimeregulations.blogspot.com/2017/07/what-if-traffic-regulators-to-make-your.html

How can any regulator who does not care about the purpose of what he is regulating hold that he knows what he is doing? “A ship in harbor is safe, but that is not what ships are for”, John A Shedd https://subprimeregulations.blogspot.com/2015/12/our-current-bank-regulatory-tragedy.html

How can any regulator allowing banks to leverage their equity different with different assets and not understanding or caring about how that distorts the allocation of bank credit to the real economy, hold that he knows what he is doing? http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

How many more houses built because its financing is risk weighted 35%, will have its basements occupied by unemployed children, because the risk weight for unrated SMEs and entrepreneurs is 100%? https://subprimeregulations.blogspot.com/2017/11/crimes-against-humanity-can-also-be.html

Who nudged regulators into using stupid and dangerous risk-weighted capital requirements for banks? The bankers?

Banks not capable of perceiving risks correctly, or not adjusting to perceived risks correctly, with size of exposure and adequate risk-premiums, should fail as fast as possible.

Banks capable of perceiving risks correctly, and to adjust to these correctly with size of exposure and adequate risk-premiums, would in fact not need to hold any capital.

Unfortunately, since banks could belong to the first group, and there is also the risk of unexpected events that could affect even the best of banks, regulators need to require banks to hold some capital.

Curiously, unfortunately, bank regulators, with the Basel Accord of 1988 introduced risk weighted capital requirements. These spelled out more risk more capital, less risk less capital. 

Though at first sight that might all sound quite logical, in terms of searching for more financial stability it makes no sense whatsoever, as what’s perceived as risky poses by just that fact alone less danger to the banks. It is what is perceived as safe than can cause banks to create excessive exposures, which if these later turn out risky could put a whole bank system in danger. 

To top it up it the risk weighting translates into allowing banks to leverage differently different assets, thereby producing different risk adjusted returns on equity than what would have been the case in the absence of this regulations, and so it introduced a serious distortion in the allocation of bank credit that is affecting the real economy.

Who could have nudged regulators to do so? Since being able to earn the highest risk adjusted returns on equity on what is perceived as safe sounds like a wet dream come true for bankers, I have my suspicions.

PS. Here an aide-mémoire on the principal mistakes of risk weighted capital requirements

If one were to construe a systemic risk that could bring bank systems down, this is one way

First: Make capital requirements for banks based on perceived risk. More risk more capital, less risk less capital. That would allow banks to leverage more with The Safe than with The Risky. That would allow banks to earn higher risk adjusted returns on equity lending to The Safe than when lending to The Risky.

Second: Allow banks to use their own risk models to decide what is risky and what is safe and therefore how much capital it needs. Alternatively allow some very few human fallible credit rating agencies to decide what is safe and what is risky.

Third: Sit down and wait for banks lending too much against too little capital to The Safe, like sovereigns, the AAArisktocracy and mortgages; within an economy weakened by too little lending to The Risky, like to SMEs and entrepreneurs.

But, oops, hold it there! Someone already did that! I think it was the Basel Committee for Banking Supervision.

Who should lead the Fed? There’s one initial and essential screening of the candidates.

Fact: Banks are allowed to leverage more with assets considered safe, like loans to sovereigns, the AAArisktocracy and mortgages, than with assets considered risky, like loans to SMEs and entrepreneurs.

So ask the candidates:

Does that mean “the safe” have even more and easier access to bank credit than usual and “the risky” have even less and on more expensive terms access to bank credit than usual?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

Do you think that might dangerously distort the allocation of bank credit to the real economy?

If the answer is no, disqualify the candidate.

If the answer is yes, then ask: 

In terms of what can pose the greatest risk to the bank system, would you agree with Basel II’s risk weights of 20% for what is rated AAA to AA and 150% for what is rated below BB-?

If the answer is yes, disqualify the candidate.

If the answer is no, then ask: 

Do you agree with a 0% risk weighting of sovereigns?

If the answer is yes, the candidate should be classified as an incurable statist and accordingly dismissed.

If the answer is no, you can then proceed with the rest of the tests.

Good luck!

PS. How many of those currently in the Board of Governors of the Federal Reserve System, would pass this test?

3 tweets that should rock the world of bank regulators, and one day will

Motorcycles are riskier than cars, so if they have a choice, people prefer cars; so more die in car accidents than in motorcycle ones

Below BB- rated are much riskier than AAAs, so bankers much prefer AAAs, so big crises happens with AAAs turned risky, not with below BB-

Our bank regulators never understood that, and assigned 20% risk weight to AAAs and 150% to below BB-s So now what? http://bit.ly/1TgB6EJ

Regulators and bankers looking out for the same risks