Saturday, August 22, 2009

Recurrent questions to my friends in the financial sector of the World Bank

When are you going to stop worrying so much about the development of the financial sector and start worrying more about the role of the financial sector in the development of the other sectors of the economy?

For how long are you going to accept those minimum capital requirement for banks based on risks of default as perceived by credit rating agencies and try to suggest some capital weights based on the purpose of the lending?

For how long are you going to accept harmonizing with the IMF frantically focusing on avoiding any bank crisis instead of focusing on getting the most development out of the whole growth and bust cycle? Are we not a "take-risks" development bank while they are a "goodnight, sleep-tight" institution?

These are no new questions. Just as an example, in March 2003, as an Executive Director of the World Bank, I said the following when discussing the “Financial Sector Assessment Program: Review, Lessons, and Issues Going Forward

“The financial sector’s role, the reason why it is granted a license to operate, is to assist society in promoting economic growth by stimulating savings, efficiently allocating financial resources satisfying credit needs and creating opportunities for wealth distribution. Similarly, the role of the assessor –in this case, WB– is to fight poverty, and development is a task where risks need to be taken.

From this perspective we have the impression that the Financial Assessment Program Report might revolve too much around issues such as risk avoidance, vulnerabilities, stress tests and compliance with international regulations, without referring sufficiently to how the sector is performing its social commitments.

As an example, only in Supplement 3, Development Issues in the FSAP, does the Bank acknowledge that; “for lower income countries with less-developed financial system, in order to be relevant to country authorities, the emphasis in the FASP must change… how residents can get a better access to a wider range of financial services”, and having to confess, on the very same page, that “no formal methodologies exist for how to address development issues in the FSAP”.

Another example is present in the survey of countries’ experiences, when in the case of country X, in response to the problems of “(i) weak credit culture with the prevalence of non-payments mechanism that undermine the development of the formal financial sector; (ii) limited access to formal, affordable financing by small and medium enterprises, a typical development trap in transition economies; and (iii) the slow pace of banking sector consolidation”, the only exemplified recommendations are; “(i) enhancement of the central bank’s ability to deal with insolvent banks, (ii) strengthening of penalty provisions and (iii) increase in minimum capital requirements”,

On a separate issue, the document Global Development Finance 2003 in relation to the minimum capital requirements of the Basel II proposals, states that they “include the likelihood of increased costs of capital to emerging market economies; and an “unleveling” of the playing fields for domestic banking in favor of international banks active in developing countries”. I believe this issue, and similar ones, should be addressed in many FSAPs, especially since WB should act as an honest broker in these matters.

Please friend, in these matters, help the Knowledge Bank evolve into the Wisdom Bank or, more humbly, the Common Sense Bank.

Thank You”