Bank regulators, mixed and served us their Basel Accord cocktail... and since, they tell us all to sing: “Don't worry, be happy.”

The Basel I Accord (28 pages) was published in July 1988 by the Basel Committee on Banking Supervision:

Risk weighted bank capital requirements with decreed weights:

0% Sovereigns, 50% residential mortgages and 100% private sector.

The film Cocktail in July 1988, released "Don't Worry Be Happy" by Bobby McFerrin.

Here's a little song I wrote

You might want to sing it note for note

Don't worry, be happy

Basel II (239 pages) was published in June 2004.

Decreed risk weights: AAA to AA rated 20% - Below BB- rated 150%

The global financial crisis, 2008-09, caused by mortgage backed securities MBS ensued. 

The land-lord say your rent is late

He may have to litigate

Don't worry, be happy

Basel III: A global regulatory framework for more resilient banks and banking systems - revised version June 2011.

In every life we have some trouble

But when you worry, you make it double

Don't worry, be happy.

Basel III, July 2024, often retitled as an “Endgame” (for the times being only 1,910 pages), is still being worked on.

But on the margin, where it most counts when banks decide in what to invest, the risk weighted bank capital equity requirements, they still reign supreme.

And many nations and many of its citizens, having to take on new debt only to service the debt they already owe, have turned into zombies. What a hangover headache that cocktail has given us! BUT they still tell us:

Don't worry, it will soon pass

Whatever it is

Don't worry, be happy

#AI #OpenAI #ChatGPT Depending on whether agreeing or disagreeing with that, what type of an economist are you?

I asked ChatGPT:

"The Basel risk weighted bank capital/equity requirements distort the allocation of bank credit; posing dangers for bank systems and weakening the economies.

Depending on whether agreeing or disagreeing with that, what type of an economist are you?"

ChatGPT answered:

The view that Basel risk-weighted capital/equity requirements distort the allocation of bank credit and weaken economies aligns with specific economic schools of thought that are critical of regulatory interventions and advocate for free market principles. Here’s how different types of economists might respond:

Agreeing with the statement:

Austrian Economists: They would likely argue that Basel regulations interfere with the natural market allocation of credit and capital, distorting economic signals. Austrian economists are typically skeptical of government intervention, seeing it as harmful to economic efficiency and the spontaneous order of markets.

Libertarian Economists: Similarly, they view heavy regulations as creating inefficiencies. They might argue that Basel rules force banks into less optimal lending practices, restricting capital flows to productive sectors and misallocating resources.

Free-Market Economists: From this perspective, Basel requirements impose costs and constraints that stifle banks' natural ability to allocate credit, reduce competition, and hinder economic growth.

Disagreeing with the statement:

Keynesian Economists: Keynesians would typically support regulations like Basel to ensure financial stability and avoid the excessive risk-taking that can lead to economic crises. They would argue that the benefits of preventing financial instability outweigh any minor distortions in credit allocation.

New Keynesian Economists: They might see Basel as essential for mitigating systemic risks in the banking system. While they might acknowledge some inefficiencies, they believe that without such rules, the risk of bank failure would be much higher, which could hurt the economy more.

Regulatory Economists: They would argue that without these safeguards, banks might take on too much risk, leading to a financial crisis, which would harm the economy far more severely than any distortions caused by regulation.

Ultimately, if you agree with the statement, you are more likely aligned with free-market or Austrian views. If you disagree, you are more likely aligned with Keynesian or other regulatory-focused schools.

I said: Thanks!

It said: You're welcome! Feel free to reach out if you have more questions or need further clarification.

ChatGPT: The discrimination in the access to bank credit bank capital/equity requirements with decreed risk weights 0% government - 100% citizens produce, where would it seem most likely to fit: Russia, Argentina or the United States?

Note: The answers are copied exactly from those given to me by ChatGPT

Here my many other questions to ChatGPT – Grok on bank regulations

#AI #OpenAI #ChatGPT As a grandfather, should I be concerned about how Basel bank regulators might have shaped the future my grandchildren will encounter?

Below the conclusion in the dialogue I had with ChatGPT on this issue. You can read the whole conversation here.

I asked ChatGPT:

"So, trying to conclude; for the best of my grandchildren’s future, had it not been best if the Basel Committee had not begun to distort the allocation of bank credit with the risk weighted bank capital/equity requirements?"

ChatGPT answered:

Yes, in many ways, it's fair to say that the Basel Committee's risk-weighted capital requirements, particularly those that favor public debt and residential mortgages, may not be the optimal approach for the long-term economic prosperity of your grandchildren. By distorting the allocation of bank credit, these regulations have had several unintended consequences that could negatively affect the broader economy over time.

Key Issues with the Basel Approach:

1. Distorted Credit Allocation: Basel regulations incentivize banks to lend where the risk-weighting is lowest—mainly government debt and residential mortgages—at the expense of more dynamic sectors like small businesses and entrepreneurship. This limits access to credit for high-growth sectors that drive innovation, economic expansion, and job creation, thus slowing overall economic dynamism.

2. Increased Systemic Risks: By pushing banks to hold more government debt and mortgage-backed assets, the system becomes more homogeneous and less resilient. When crises hit these sectors, the effects are more widespread and severe. Examples like the 2008 financial crisis (fueled by mortgage-backed securities) show that concentration in a "safe" asset class can be a huge risk.

3. Stifling Innovation and Economic Growth: Small businesses and startups, typically more dependent on bank credit than large corporations, are squeezed out of the credit system. As a result, future generations may see slower job creation and economic opportunity, which is essential for a thriving, innovative economy. This could make it harder for your grandchildren to find opportunities in high-growth sectors or start their own businesses.

4. Long-Term Fragility: While these rules may provide short-term stability, they can foster long-term economic fragility. An overreliance on public debt and housing markets makes the financial system more vulnerable to large-scale crises in these sectors, which could hurt future generations more severely than smaller, more localized risks in other areas of lending.

Alternatives for a Healthier Future:

Had the Basel Committee encouraged more balanced credit allocation—without such heavy favoritism toward certain asset classes—banks might have been more inclined to lend to small businesses, entrepreneurs, and other high-growth sectors. This would likely lead to:

More Dynamic Economic Growth: By providing adequate funding to small businesses and startups, there would be more room for innovation and job creation, which would benefit future generations.

Greater Diversification: A more balanced allocation of credit across various sectors would reduce systemic risks. Banks would be less likely to concentrate too much exposure in areas like public debt or housing markets, making the system more resilient to crises.

Stronger Economic Foundations: A diversified banking system, funding a range of economic activities, builds a stronger economy less prone to the boom-bust cycles associated with over-reliance on specific asset classes.

Conclusion:

Yes, had the Basel Committee not introduced such a heavy risk-weighting bias that favors public debt and residential mortgages, it’s likely that the banking sector could have supported a more diverse and resilient economy. This might have provided your grandchildren with greater opportunities for entrepreneurship, more dynamic economic growth, and less exposure to systemic risks that could lead to future crises. By creating a more balanced and equitable financial system, the long-term prospects for future generations would likely be improved.

I told ChatGPT:

"I see you agree that, as a father and grandfather, I have all kinds of reasons to be concerned with what some besserwisser bank regulators have concocted during the last decades with the Basel regulations. So, thanks!"

ChatGPT answered:

You're absolutely right to be concerned, and it's completely understandable to question the decisions that have shaped the financial world your children and grandchildren will inherit. The complexities of banking regulations often have long-term consequences that aren't immediately apparent, and it's important to recognize how these policies could affect future generations.

If you ever want to discuss more or explore other areas of concern for the future, I'm always here to help.

I said: Thanks again. I will come back!

ChatGPT said: You're very welcome! I look forward to our next conversation. Take care, and feel free to reach out whenever you're ready!

Note: The answers are copied exactly from those given to me by ChatGPT or Grok.

Here my many other questions to ChatGPT – Grok on bank regulations

AI OpenAI ChatGPT: Does Income Tax Credit (ITC) distort the incentives to get back to work?

I asked ChatGPT:

"The Income Tax Credit (ITC) allows those earning less than a specific income level from working to get a refund. Could this distort the incentives to get back to work?"

ChatGPT answered:

"The Income Tax Credit (ITC), commonly referred to as the Earned Income Tax Credit (EITC) in the United States, is indeed designed to provide financial assistance to low-to-moderate-income individuals and families. It is structured as a refundable tax credit, meaning that if the credit amount exceeds the tax liability, the taxpayer receives the excess as a refund. While the ITC aims to alleviate poverty and encourage individuals to enter or remain in the workforce, there are some potential distortions to work incentives that arise from its design:

Income Effect: For individuals close to the income threshold for receiving the credit, there might be a disincentive to earn additional income. This is because as their earnings increase, they may become ineligible for some or all of the credit, effectively reducing their overall income. This can create what's known as an "income plateau," where additional work doesn't translate to significant net gains after factoring in lost benefits.

Substitution Effect: Some individuals might choose not to work or reduce their work hours if they believe that the value of the credit they receive outweighs the benefits of working, particularly in low-wage jobs. This effect is more pronounced for individuals whose potential earnings are relatively close to the maximum credit amount.

Participation Effect: Conversely, the ITC can also incentivize individuals who would otherwise not be part of the labor force to enter it, as the credit provides a financial reward for working. This is especially relevant for individuals who face barriers to employment, such as lack of skills or childcare, but are encouraged to seek work due to the financial assistance offered by the credit.

Work vs. Welfare Tradeoff: The ITC, along with other social welfare programs, creates a tradeoff between work and welfare. Individuals might weigh the benefits of participating in the workforce against the benefits of receiving government assistance, and the design of the ITC can influence this decision-making process.

Overall, while the ITC aims to strike a balance between providing financial support for low-income individuals and encouraging workforce participation, its design can indeed create some distortions in work incentives. Policymakers must carefully consider these tradeoffs when designing and evaluating such programs to ensure they effectively alleviate poverty while minimizing unintended consequences on labor market behavior."

I asked ChatGPT:

Have you any ideas of how that work disincentivizing distortion could be eliminated or at least diminished?

ChatGPT answered:

"Addressing the work disincentivizing distortions associated with income tax credits like the Earned Income Tax Credit (EITC) requires careful consideration of program design and potential policy adjustments. Here are some ideas that could help mitigate these distortions:

Phasing Out Gradually: Rather than abruptly cutting off eligibility for the credit once income thresholds are exceeded, policymakers could implement a gradual phase-out of the credit. This means that individuals would still receive partial benefits as their income increases, reducing the disincentive to work more hours or seek higher-paying employment.

Increasing the Income Thresholds: Adjusting the income thresholds at which the credit phases out could also help mitigate disincentives to work. By allowing individuals to earn more before losing eligibility for the credit, policymakers can encourage greater workforce participation without sacrificing the goal of targeting assistance to low-income households.

Expanding Eligibility Criteria: Broadening the eligibility criteria for the credit to include more individuals, such as those without children or noncustodial parents, could help incentivize workforce participation among a wider range of demographics. This could involve increasing the maximum age limit for eligible individuals or reducing the minimum age requirement.

Enhancing Education and Training Opportunities: Investing in education and training programs that equip individuals with the skills needed to secure higher-paying jobs can help reduce reliance on income tax credits as the primary source of support. By improving access to education and training, policymakers can empower individuals to increase their earning potential and reduce dependence on government assistance programs.

Providing Work Support Services: Offering support services such as affordable childcare, transportation assistance, and access to job placement services can help individuals overcome barriers to employment and increase their participation in the workforce. By addressing logistical challenges associated with work, policymakers can make it more attractive for individuals to seek and maintain employment.

Promoting Financial Literacy and Asset Building: Educating individuals about the long-term benefits of workforce participation, saving, and asset building can help counteract short-term disincentives to work. By providing financial literacy training and promoting saving strategies, policymakers can empower individuals to make informed decisions about their financial futures.

Evaluating and Adjusting Policy Regularly: Regular evaluation of the effectiveness of income tax credits and other social welfare programs is essential for identifying potential unintended consequences and making necessary adjustments. Policymakers should continuously monitor labor market trends, program participation rates, and socioeconomic indicators to inform policy decisions aimed at mitigating work disincentives.

By implementing a combination of these strategies and continuously evaluating their effectiveness, policymakers can work to diminish the work disincentivizing distortions associated with income tax credits like the EITC while still achieving the overarching goal of alleviating poverty and promoting workforce participation."

I asked ChatGPT:

How could that gradual phase-out of the credit be implemented in an easy manageable way, meaning so that it does not cost more in administrative efforts than what it helps? 

ChatGPT answered:

"Implementing a gradual phase-out of the credit in a cost-effective and manageable way requires careful consideration of administrative feasibility. Here are some approaches that could be considered to achieve this:

Simple Formula-Based Phase-Out: Design a formula-based approach where the credit gradually decreases as income increases above the eligibility threshold. This formula could be structured to reduce the credit by a certain percentage for each additional dollar of income earned above the threshold. Automating this process through tax preparation software or online filing systems could minimize administrative burdens.

Use of Marginal Tax Rates: Integrate the phase-out of the credit with existing marginal tax rates. As income increases, the credit could be reduced by a fraction of the individual's marginal tax rate. This leverages existing tax infrastructure and calculations, reducing the need for separate administrative processes.

Regular Updates to Eligibility Criteria: Implement periodic updates to the income thresholds and phase-out rates based on inflation or changes in the cost of living. This ensures that the credit remains targeted to low-to-moderate-income individuals while also simplifying administration by minimizing the need for frequent adjustments.

Simplified Reporting Requirements: Streamline reporting requirements for taxpayers by providing clear guidance and pre-filled forms that reflect the phase-out calculations. Simplified reporting can reduce errors and the need for manual review, ultimately lowering administrative costs.

Integration with Payroll Systems: Explore options for integrating phase-out calculations directly into payroll systems for individuals who receive wages or salary income. This would automate the adjustment of the credit based on income levels, reducing the burden on taxpayers and tax authorities alike.

Public Education and Awareness Campaigns: Invest in public education campaigns to ensure that taxpayers understand how the phase-out works and what impact it may have on their eligibility for the credit. Clear communication can help minimize confusion and reduce the need for additional administrative support.

Data Sharing and Verification: Utilize existing data sources, such as income reported to employers or government agencies, to verify income levels and determine eligibility for the credit. Leveraging data sharing agreements can streamline verification processes and reduce the need for manual documentation from taxpayers.

By adopting these approaches and leveraging existing infrastructure and technologies, policymakers can implement a gradual phase-out of the credit in a cost-effective and manageable manner, minimizing administrative burdens while still achieving the goal of targeting assistance to those who need it most.

I replied: I might come back to this but, meanwhile, many thanks! 

You're welcome! If you have any more questions or need further assistance in the future, feel free to return anytime. Have a great day!

Note: The answers are copied exactly from those given to me by OpenAI

ChatGPT - OpenAI: Getting to know you!

#AI ChatGPT OpenAI: Should macroeconomic study courses not have to include “Unexpected Regulatory Consequences”?

I asked ChatGPT:

Economists (me included) are prone to think they know better (all) (besserwissers – sabe-lo-todo); and are therefore quite inclined to wanting to (dangerously) regulate (manipulate) free markets.

In this respect, should university macroeconomy studies, include at least one full semester course titled, for example, “Unexpected Regulatory Consequences”?

ChatGPT answered: 

"Introducing a course titled "Unexpected Regulatory Consequences" in university macroeconomics studies could be a valuable addition to the curriculum. Such a course could provide students with a deeper understanding of the potential unintended effects and consequences of regulatory interventions in free markets.

Economists, like any other professionals, are not immune to biases and the belief that they have all the answers. This can sometimes lead to a tendency to favor excessive regulation or intervention in markets, often with good intentions but without considering the unintended consequences. By offering a course specifically focused on exploring these unexpected outcomes, students would be encouraged to critically analyze the impact of regulatory measures on market dynamics, individual behavior, and societal outcomes.

Here are a few potential benefits of including a course on "Unexpected Regulatory Consequences":

1. Awareness of unintended effects: The course could help students develop a broader perspective on the potential unintended consequences of regulations. By examining real-world examples and case studies, students would gain insights into the complex interactions between regulations and market dynamics.

2. Critical thinking and analysis: The course could promote critical thinking skills by encouraging students to evaluate the trade-offs associated with different regulatory interventions. Students would learn to question assumptions and examine the potential costs and benefits of regulations more thoroughly.

3. Policy evaluation and refinement: By understanding the unintended consequences of regulations, students would be better equipped to evaluate existing policies and propose more effective alternatives. This could contribute to the development of more refined and well-designed regulatory frameworks in the future.

4. Balanced approach: The course could provide a counterbalance to the traditional emphasis on the benefits of regulation. By examining the potential drawbacks and limitations of regulatory interventions, students would be encouraged to adopt a more nuanced and balanced perspective when considering policy options.

It's worth noting that including this course does not imply that all regulatory interventions are inherently bad or should be avoided. Rather, it aims to promote a deeper understanding of the complexities involved in regulating markets and to encourage economists to approach policy-making with greater caution and consideration of unintended consequences.

Overall, introducing a course on "Unexpected Regulatory Consequences" would be a valuable addition to the curriculum, helping students develop a more comprehensive understanding of the challenges and potential pitfalls associated with regulating free markets."

I asked ChatGPT:

"The analysis of the consequences of the responses to Covid-19 would be a good example of what to study in “Unexpected Regulatory Consequences”. That said, for economists, an analysis of the way too much ignored distortion in the allocation of credit produced by the risk weighted bank capital requirements, and which have, in one way or another, been in place since 1988’s Basel I, could be more important study case. Do you agree?"

ChatGPT answered: 

"Yes, analyzing the consequences of the responses to Covid-19 would indeed be a relevant example to study in a course on "Unexpected Regulatory Consequences." The pandemic has triggered a range of regulatory interventions across various sectors and countries, and understanding their unintended effects would provide valuable insights for economists and policymakers.

Regarding the distortion in the allocation of credit caused by risk-weighted bank capital requirements, it is certainly an important study case. The Basel Accords, starting with Basel I in 1988 and subsequent iterations, introduced risk-weighted capital requirements as a way to ensure banks maintain sufficient capital buffers based on the perceived riskiness of their assets. However, this approach has attracted criticism for potentially creating distortions and misallocations of credit.

Some arguments against risk-weighted capital requirements include:

1. Incentives for regulatory arbitrage: Risk-weighted capital requirements can incentivize banks to engage in regulatory arbitrage, whereby they seek out assets that are assigned lower risk weights, leading to an excessive concentration in certain sectors or asset classes.

2. Complexity and opacity: The calculation of risk weights involves subjective judgments and modeling assumptions, which can introduce complexity and opacity into the regulatory framework. This complexity may undermine the effectiveness of the regulations and make it harder to assess the true riskiness of bank portfolios.

3. Pro-cyclical effects: Risk-weighted capital requirements can amplify the booms and busts of the business cycle. During periods of economic expansion, perceived risks are often lower, leading to lower capital requirements and potentially excessive lending. Conversely, during economic downturns, perceived risks increase, causing higher capital requirements and potentially exacerbating credit crunches.

4. Failure to capture systemic risks: Risk-weighted capital requirements primarily focus on individual asset risk, but they may not adequately capture systemic risks that can arise from interconnectedness and contagion effects within the financial system.

Studying the consequences of risk-weighted capital requirements could help economists understand the potential drawbacks and unintended consequences of these regulatory measures. It could also inform discussions on alternative approaches to ensure financial stability and avoid distortions in credit allocation.

In conclusion, while the analysis of the consequences of responses to Covid-19 is relevant, studying the distortion in credit allocation caused by risk-weighted bank capital requirements is indeed an important study case that economists should consider when examining unexpected regulatory consequences."

Note: The answers are copied exactly from those given to me by AI ChatGPT

The response to Covid-19 has caused an intergenerational conflict of monstrous proportions.

The risk weighted bank capital requirements drugged bankers.

Here my many other questions to ChatGPT – Grok on bank regulations

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. 

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 😩

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

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

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

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?

President Trump, here is a conflict of interest on which many would appreciate you acted on in your own future self-interest.

President Trump. 

I am not an American, so I did not vote. But had I been I must confess I would most likely have voted for the Gary Johnson escape-valve. Congrats anyhow!

Mr. President, you have all your life been an entrepreneur, of one sort or another. As such we could easily presume you have quite often needed to have access to bank credit. Once you are back to civil life in some years, I also assume you would like to reassume your life as entrepreneur, since once one, forever one, and therefore to again have access to bank credit.

Now President Trump, you might not be much aware of it, few really are, and there are of course those interested in it not to be known, or at least not understood but, since 1988, with the Basel Accord, for purposes of determining how much capital banks should hold, the risk weighted for ordinary citizen borrowers was set at 100%, while if it was the central government doing the borrower, then the risk weight was 0%. Yes, you read right… 0%!

That has introduced a disastrous discrimination against all SMEs, start-ups and entrepreneurs when accessing bank credit. The risk aversion that regulation signifies banks no longer finance the riskier future our children need to be financed, they mostly just refinance the “safer” past and present.

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

To top it up, regulators have not been able to realize that all this does not make the banking sector any safer. All major bank crises have only resulted from unexpected events, criminal behavior or excessive exposures to what ex ante was perceived as very safe but that ex post turned out very risky. No major bank crises ever was the result of excessive exposures to something ex ante perceived risky.

“May God defend me from my friends, I can defend myself from my enemies” Voltaire

So President Trump, please help America, and the rest of the world ,to banish forever this dangerous nonsense of the risk-weighted capital requirements for banks.

I have tried to inform, for instance your Consumer Financial Protection Bureau CFPB and so many others about this, but they have not been interested. You as an Entrepreneur President do surely stand a better chance to catch their attentions.

PS. When it comes to bank regulations that could destroy the economy of your country, is that not also an issue for Homeland Security?

PS. What poses a bigger threat to American jobs, Mexicans, Canadians or robots?

Should there be clawbacks clauses for university professors? Yes! Especially for finance professors.

University professors have been able to earn much higher salaries thanks to the availability to their students of credit for education.

Now many of their students are struggling to repay their loans, because market conditions, and the economic benefits of education, did not turn out as expected.

So clearly there is a case to ask whether there should not be some claw-back clauses applicable to them

I surely think so, and especially in the case of the professors in finance.

There, right before their eyes, with Basel I in 1988, and with Basel II in 2004, the bank regulators introduced risk weighted capital requirements for banks.

And these regulations discriminated against that financing of the riskier future that the students needed to be financed in order to aspire to get good paying jobs; and those regulations discriminated in favor of the safer present that had grown out of the risk-taking of the past, and which was of more interest to soon retiring professors.

I believe that never ever before, has an education community let down its students so much.

There’s just got to be some formal claw-back.

PS. Here again is an aide memoire that explains some of the regulatory monstrosities.