Friday, September 25, 2009

Two comments on the G20 draft

1st comment:. On financial sector compensation, the draft said the G20 fully endorsed the standards of the Financial Stability Board "aimed at aligning compensation with long-term value creation, not excessive risk taking."

And do not the poor and the developing world, where most of the “perceived risks” tend to live, also have an equal right to ask for “long-term value creation”, not excessive risk-aversion, as that which is present in the current Basel capital requirements for banks?

2nd comment: The G20 draft said it supported the introduction of a leverage ratio as an additional measure to the Basel II capital framework and that all major G20 capital centers committed to adopt that framework by 2011.

The introduction of a leverage ratio as an additional measure does not, on the margin, diminish any of the arbitrary risk averseness introduced by Basel II and that creates additional costs for the financing of all perceived as risky, and that are layered on top of the risk spreads already charged by the markets on perceived risks.

This amounts to an outright discrimination of development and an outright indirect subsidy to what has already been developed. This is simply shameful!

Friday, September 18, 2009

The 800 pound gorilla not seen in development finance

The current regulatory system of the banks agreed upon in Basel by some developed nations and applied in all of the developed world and much of the rest, orders the bank to have 8 percent in capital when lending to an ordinary client with no credit rating but only 1.6 percent when lending to an AAA rated client. 8 percent is 400 percent more than 1.6 percent.

The above amounts to an immense discrimination that pushes up the volume of funds available and down the cost when financing the “lower-risk” part of the world; and pushes down the funds available and up the cost when financing the “higher-risk” part of the world.

The rich and developed, where are they most likely to be perceived to live, in the “higher-risk” or in the “lower-risk” part of the world?

The poor and developing, where are they most likely to be perceived to live, in the “higher-risk” or in the “lower-risk” part of the world?

That is why when the rich and developed offer the poor and developing world the possibilities of a non-distorting and transparent Tobin tax of 0.005 percent on financial transactions they should answer “Thank you very much, but we much prefer you eliminate the distorting and opaque Basel tax on risk instead”

And this is no minor issue. Just in 2004 to 2008, about three trillions of dollars, more than the World bank has lent or given out in grants in total since it was created; thanks to the bias in favor of perceived low risk in the capital requirements for banks, and thanks to the AAA signs set up by the credit rating agencies, were channeled to finance what, when compared with the real needs in the world (even of the rich and developed), can only be classified as a quite useless house-value boom.

The world to move forward needs risk-taking. We cannot afford to have the future of the world to be placed in the hands of a neurotic generation of baby-boomers, who wish to create a lien on the whole world, through a reverse mortgage, so as to lie down and die in tranquility while murmuring their “Après nous le deluge”

Please stop worrying so much about bank defaults and more about the default of the world.