Tuesday, October 26, 2010

Development economists, you have now been shamed

Now most development economists have been shamed by none other than Vikram Pandit, the chief executive of the Citigroup and who, in the Financial Times of October 26, is reported as saying “Under Basel, the ‘sweet spot’ business model for banks in the developed world will be to take retail deposits from mom and pop – small but stable customers – and lend only to big business and the wealthy. I do not believe this is the banking system we want”

Of course this is not the arbitrary regulatory discrimination we need, and I have been arguing against it since 1997 with for example a document I presented at the UN in October 2007 titled “Are the Basel bank regulations good for development?”. Unfortunately much of the development debate of developing countries has been hijacked by baby-boomer development economists from developed countries and who cannot get it in their head that development requires a lot of risk-taking… and that therefore concentrating too much on avoiding bank failures will hinder the growth and the development of the economy.

As an example it suffices to read the Recommendations by the Commission of Experts of the President of the General Assembly on reforms of the international monetary and financial system chaired by Joseph Stiglitz. Nowhere in it do we find a word about the utterly misguided and odiously discriminatory capital requirements for banks imposed by the Basel Committee and which signify that a bank needs to have 5 TIMES more capital when lending to small businesses and entrepreneurs (100%-risk-weight) than when lending to triple-A rated borrowers (20%-risk-weight); and this even though the first are already paying much higher interest which goes to bank capital; and this even though no financial crisis has ever resulted from excessive lending to those perceived as “risky” as they have all resulted from excessive lending to those ex-ante perceived as not risky.

The Commission of Experts speak of increasing risk-premia but fail to notice that one of the reasons for that is the arbitrary regulatory risk-adverseness. It also speaks out against under-regulated and dysfunctional markets that fail to allocate capital to high productivity uses, without noticing that perhaps the major cause of markets being dysfunctional is often bad regulations, such as those issued by the Basel Committee.

Perhaps it is high-time economists from developing countries start to develop their own development paradigms; some of which might even help developed countries to keep from submerging.

And meanwhile, all you traditional development economists, put on your cones of shame.

A final question should Vikram Pandit now move on to the World Bank?

Monday, October 25, 2010

God make us daring!

A verse of Psalm 288 Text: F Kaan 1968 B G Hallqvist 1970 reads:

“God, from your house, our refuge, you call us
out to a world where many risks await us.
As one with your world, you want us to live.
God make us daring!”

“God make us daring!” That is indeed a prayer that the members of the Basel Committee do not even begin to understand the need for.

Monday, October 18, 2010

The world needs risk-taking in order to move forward

The willingness to take risks is one of the most powerful sources of energy. If we do not channel risk-taking into the construction of society, it will inevitably flow into the destruction of society.

The current regulatory paradigm imposed by the Basel Committee on Banking Supervision on the banks, and to which most of the world has agreed to, does not promote our bankers to be intelligent risk-takers in their fundamental role of satisfying the financial needs of all those other risk-takers like small businesses and entrepreneurs.

On the contrary, what these regulations do is to stimulate plain dumb risk-adverseness among the bankers by increasing the returns to banks on what is perceived by some credit rating agencies as being, ex-ante, of very low risk… and which is also precisely the terrain where excessive lending or investments that lead to a systemic crisis always bloom.

Unless the bank regulators are determined to regulate for submerging countries they must come to understand much better the whole concept of risk.

Sunday, October 10, 2010

IMF and World Bank, please help stop the Basel Committee from bullying the “risky”.

Access to bank credit is hard and expensive enough for those small businesses, entrepreneurs with no access to good credit ratings to additionally be subjected to what could be considered as bullying by the Basel Committee on Banking Supervision… or just plain odious discrimination.

Though lending to this “risky” group has never ever originated any bank or financial crisis, since those only happen because of excessive investments or lending to what is perceived as not risky, the strong regulator bullies decided to impose on the banks 5 TIMES more capital requirements when lending to the weak and “risky” (100% regulatory-risk-weight) than when lending to the triple-A rated (20% regulatory-risk-weight).

And this even though this group of clients, by being charged higher interest rates on account of their market-risk-weights, already contribute much more to the capital of  banks than any triple-A rated client.

And this even though this group of clients, with little alternative access to financing, is supposed to stand first in line as bank clients; and this even when this group is first in line to supply the world with the economic growth and the jobs it always needs.

In many places bullying is a punishable act that can lead to jail sentences. Though the Basel Committee might deserve it, especially since by bullying the weak it pushed the banks over the triple-A cliff, it would be hard to jail it. As the “risky” has so much less lobbying power than the “not-risky” could the IMF and World Bank at least help to stop the Basel Committee from bullying the “risky”? Please!

Not-rated or rated risky of the world, unite!

Below are three occasions where I recently pleaded IMF and the World Bank for the above. Will I also need to get down on my knees?

The Civil Society Town-Hall Meeting
In the video you can find my question in minute 47.28, Dominique Strauss-Kahn’s answer in minute 1.01.08, and Robert Zoellick’s answer in minute 1.16.32

Structural Reforms: Effective Strategies for Growth and Jobs
Here my first and second question can be seen from minute 1.14.25 on.

Accelerating Financial Inclusion–Delivering Innovative Solutions
My question (not the best sound quality, but it is a similar question) can be found in minute 1.04.03 on

Per Kurowski
A former Executive Director at the World Bank (2002-2004)

Thursday, October 7, 2010

Today I had a great day!

For someone who since 1997 has been opposing the regulatory paradigm used by the Basel Committee for Banking Supervision, even as an Executive Director of the World Bank 2002-2004, today was a great day.

As a member of Civil Society, whatever that now means, at a City Society Town-hall Meeting during the 2010 Annual Meetings, I had the opportunity to pose the following question to Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund, and to Robert B. Zoellick, the President of the World Bank:

“Right now, when a bank lends money to a small business or an entrepreneur it needs to put up 5 TIMES more capital than when lending to a triple-A rated clients. When is the World Bank and the IMF speak out against such odious discrimination that affects development and job creation, for no good particular reason since bank and financial crisis have never occurred because of excessive investments or lending to clients perceived as risky?”

Dominique Strauss-Kahn answered in no uncertain terms that “capital requirement discrimination has no reason to be” and Robert B. Zoellick agreed and pointed to what he has done in order to diminish the regulatory discrimination against trade finance.

The question that now floats around there out in the open, is what the Basel Committee on Banking Supervision, the supreme global regulatory authority, has to say about that, because bank capital requirement discriminations based on perceived risks is precisely the heart and soul of their regulatory paradigm.

Real development does not occur in a safe attraction park

Developed countries’ bank regulators came up with the notion that if they required banks to have more capital when they invested or lent to someone perceive as more risky by the credit rating agencies and less capital when they invested or lent to someone perceived as less risky, then their banks would never default again and everyone would live forever happy.

Of course in order to believe in that illusion they had to ignore the historic truth that no financial or bank crisis has ever occurred from excessive lending or investment in what is perceived as risky, the markets and bankers are much too coward for that, they have all resulted from excessive lending or investment in what is perceived as not risky.

But we developing countries and emerging countries, we know better that without intelligent risk-taking, primarily by our bankers, there will be no development… and that the thought of risk-free development could only happen in a Disney sponsored super safe developer’s attraction park, not in the real world.

I beg and I beg and I beg again for the World Bank to lift the banner of risk-taking in the name of development and in the name of the developing and emerging countries.

If the developed world feel they have reached a plateau were they just want to try to defend what they have and are so desperate in avoiding risks, well that is their problem. They will be un-developing and submerging… but the rest of us cannot afford to do so... under any circumstances.

Enanitos Verdes phrase it so right when they sing about their need and their right of “having to run the risk of getting up, in order to keep on falling”

Friday, July 2, 2010

A letter to finance and development ministers of developing and developed countries.

Do you finance and development ministers believe that it is the purpose of your commercial banks to help nurture those small businesses and entrepreneurs that create new jobs while they become large enough to have credit ratings and access to capital markets?

Do you finance and development ministers believe that bank regulations are not there in order to increase the returns of banks in areas that are perceived as having low credit default risks and therefore already much favored by the markets?

Do you finance and development ministers believe that the banks should work as bridges directing capitals to generate growth and jobs and not just serve as tolls to assure profits to the financial sector?

Do you finance and development ministers believe that a 450 pages long “Financial Sector Assessment handbook”, published in 2005 by the World Bank and the International Monetary Fund, should contain more than 10 pages and the suggestion of only “express a general view” on the issue whether the financial services are adequately serving the needs of the real economy?

Do you finance and development ministers believe that there are other risks in the world much more important for the future wellbeing of your country than the risks of banks defaulting?

Do you finance and development ministers believe that the debt-sustainability framework should be about more than just sending the message that debts are good as long as they are sustainable?

Do you finance and development ministers believe that after a crisis like the current one exploded, regulators would be busy revising their regulatory paradigm instead of digging us even deeper in the hole we’re in?

If you do believe so you would perhaps want to contact someone like me.

Otherwise keep on doing what the Basel Committee and the Financial Stability Board and the International Monetary Fund and the big global banks want you to do.

Of course, much better than just contacting someone like me would be if you could contact the World Bank directly on the issue of banking and development. Unfortunately, ever since the Bank-Fund Financial Sector Liaison Committee was set up in 1998, the experts in the World Bank, in the name of harmonization, have been very much silenced by those in the Fund who, come what may, can only dream about of financial stability.

Best regards

Per Kurowski

A former Executive Director of the World Bank (2002-2004)

Thursday, July 1, 2010

The Basel Committee makes small businesses and entrepreneurs pay much more for their bank credit

When compared to a regulatory system with equal bank capital requirements for all type of assets, the Basel system that imposes different requirements based on some arbitrary risk-weights related to credit ratings, implies that a small business needs to pay about 2 percent (200 basis points) more in interest rates in order to stay competitive when accessing bank credit.

Suppose a bank feels that the normal risk premium should be .5 percent for an AAA rated company and 4 percent for a small business. If the bank was required to have 8 percent for both assets and could therefore leverage itself 12.5 to 1, then the expected before credit loss margin on bank equity for the AAAs would be 6.25% and for the small business 50%, a difference of 43.75%.

But, since the bank is allowed by Basel to hold only 1.6 percent against AAA rated assets, which implies permitting a leverage of 62.5 to 1, the previous margin 6.25% margin for AAA assets becomes a whopping 31.25%, which now implies a difference in the margins on equity of only 18.75% when compared to that generated by the small businesses.

In order to restore the initial required competitive margin difference of 43.75, now only 18.75% the small businesses will have to generate for the banks an additional gross margin of 25 percent, which, divided by the 12.5 to 1 leverage allowed for their class of assets, comes out to be the additional 2 percent in interest rate referred to.

Of course a complete analysis would require considering many other dynamic factors, but those would only help to fog the basic truth that our regulators are discriminating against those the banks are most supposed to serve.

What will it take for the regulator to understand that this is no minor problem, especially when so much of any job recovery lies in the hands of small businesses and entrepreneurs?

What will it take for the regulator to understand and admit that the regulatory discrimination in favor of the AAAs caused the current financial crisis?

Monday, May 10, 2010

We do not need a "Financial Stability Board" we need a "Financial Systems Working for the World Board."

You can put the responsible for the financial stabilization from all the countries of the world on this Board and you will not achieve diversity nor will it serve any real good purpose since finance is much more than a pure wimpy quest for stability.

Allowing these one-kind-of mind regulators to do whatever they please in their mutual admiration club will only result in that hubris that had them thinking they could control for risk; designing capital requirements for banks that required a 12.5 to one leverage when lending to small businesses and entrepreneurs, those on whom we depend so much on for jobs, but cannot afford being rated by the raters; but allowed a 62.5 to one leverage, five times higher, when banks were stocking on public debts like Greece’s, just because some human fallible credit rating agencies rated Greece as good.

Do you believe for instance this should be the Charter for an institution designed to make the Financial System to work for us?

Article 1. Objectives of the Financial Stability Board

The Financial Stability Board (FSB) is established to coordinate at the international level the work of national financial authorities and international standard setting bodies (SSBs) in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. In collaboration with the international financial institutions, the FSB will address vulnerabilities affecting financial systems in the interest of global financial stability.

Article 2. Mandate and tasks of the FSB

(1) As part of its mandate, the FSB will:

(a) assess vulnerabilities affecting the global financial system and identify and review on a timely and ongoing basis the regulatory, supervisory and related actions needed to address them, and their outcomes;
(b) promote coordination and information exchange among authorities responsible for financial stability;
(c) monitor and advise on market developments and their implications for regulatory policy;
(d) advise on and monitor best practice in meeting regulatory standards;
(e) undertake joint strategic reviews of the policy development work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities and addressing gaps;
(f) set guidelines for and support the establishment of supervisory colleges;
(g) support contingency planning for cross-border crisis management, particularly with respect to systemically important firms;
(h) collaborate with the International Monetary Fund (IMF) to conduct Early Warning Exercises; and
(i) undertake any other tasks agreed by its Members in the course of its activities and within the framework of this Charter.

(2) The FSB will promote and help coordinate the alignment of the activities of the SSBs to address any overlaps or gaps and clarify demarcations in light of changes in national and regional regulatory structures relating to prudential and systemic risk, market integrity and investor and consumer protection, infrastructure, as well as accounting and auditing.

Warning!: After some years of giving the big banks growth hormones to help them turn into “Too-Big-To-Fail-Banks” any day these stabilizers will inform us who these definite TBTF are, and then we are really stuck with them, forever, or at least while they eat each other up and we are finally left with “The Only Bank of the World”

Perhaps Joseph Stiglitz should return his Nobel Prize

Stiglitz correctly holds that whenever there is imperfect information or asymmetric information, in essence always, the reason the invisible hand seems to be invisible it is because it is not there. One of the problems for this is of course that the markets are not efficient information transmitters… because if they were “no one would have any incentive to gather information”.

Is this why he never spoke out when the regulators appointed the credit rating agencies as official information gatherers for the purpose of establishing the capital requirements of banks?

If so how intellectually stupid to think that giving so much power to some very few opinion givers would solve the lack of asymmetric information in the market and not just dangerously increase the size of the asymmetric information gaps? He should perhaps return his Nobel Prize!

Stigliz is now also telling us we should ask “what is the financial system supposed to do?” Why did he himself not ask that before? Did he not know that our current primary bank regulators, those holed up in the Basel Committee, do not utter a word on the purpose of our banks in the Basel II regulations approved by G10 in June 2004?

The regulators in Basel, with amazing hubris thinking they could control for risk, designed capital requirements for banks that while allowing for what sounds like a reasonable 12.5 to one leverage when lending to small businesses and entrepreneurs, those on whom we depend so much on for jobs, but cannot afford being rated by the raters; they permitted the banks to leverage 62.5 to one, five times more, when stocking on public debts like Greece’s, just because some human fallible credit rating agencies rated Greece as good? Did Stiglitz not know about this either? For someone who likes to talk so much about development, he should have.

PS.1. Stiglitz states “The financial sector paid good money to make sure the regulators weren’t doing what they were supposed to do!” If I was a member of the Basel Committee, which of course I am not, I would ask Mr. Stiglitz to clarify what he seems to be implying.

PS.2. In minute 55:50 you hear Stiglitz saying: “What rate of return do we need to get on our investments in order for the tax revenues that we get from the short run growth and from the long run growth lead to an actual reduction in the national debt in the long run?; and the answer is a very low return, only about 5 to 6 percent return on public investments will lead to a long lower long term national debt; and the evidence is that the returns from investments for instance in public technologies are much-much higher…. so we should encourage expenditure that yield returns.”

And when I hear that I shiver, because I know that he knows, this argument will support expenditure that will not yield returns… but which is ok with his agenda. Somewhere in there, Stiglitz refers to “when we hear those politicians talk” What a laugh!

Sunday, March 7, 2010

In order for the world to recover its footing it cannot be afraid of risks.

Figure 2.1 of the Global Economic Prospects 2010, Crisis Finance, and Growth, page 49, is titled “Since the early 2000s, credit expansion has grown more than twice as fast as nominal GDP”. In it we see that Global Banking Assets followed closely World nominal GDP until it accelerates in 1997 and truly explodes around 2004. At the end the index of 100 at June 1990 had grown to about 580 for Global Banking Assets while only to around 250 for the World nominal GDP.

The figure contains most of the mostly untold truth of what led us to this crisis, namely the incredible relaxation of the capital requirements that resulted from Basel I and especially Basel II (1994) when the regulators decided that the credit rating agencies were capable of identifying what was risky and what was not.

The capital requirements for banks were brought down from a traditional range of 8-12 percent for any type of assets to an unbelievable low 1.6 percent when related to operations with private sector AAA ratings or even zero percent for the case of the sovereign AAAs. These lowering of capital requirements released a tremendous lending power of the banks, and which created havoc in the capital allocation mechanism of the markets and caused a stampede into safe-havens that, as a consequence, became overcrowded and extremely dangerous AAA havens.

It is an untold story as comes clear from the following paragraph that appears on the same side of the report and that pertains to one of “the competing and not necessarily contradictory explanations” for the crisis. It reads: “An excessive loosening of regulatory oversight. The reduction of regulatory barriers to speculation and excessive reliance on self regulation of the banking sector in industrial countries generated and failed to curb excessive risk taking by financial institutions.”

And I ask how can one speak about excessive reliance on self regulation of the banking sector, when the risk analysis that determines the adequacy of bank capital is outsourced to some few human fallible credit rating agencies?

Yes, ex-post it might seem as excessive risk-taking, but ex-ante it was most clearly a result of an excessive trust in the credit rating agencies capabilities of identifying what is not risky, as if risks are perfectly identifiable and quantifiable.

What is now much weighing down the road to recovery is the need to rebuild those real bank equity ratios that were consumed by the supposedly risk free AAAs and which, from figure 2.1, seems to be extraordinarily large amounts.

But, we also need to correct the most basic fault of the current paradigm of our financial regulations, namely that the regulators, on top of those benefits that coward capitals already assigns to what is perceived having low risk, felt they had to lay another layer of benefits in terms of low capital requirements for banks. What has the risk of bank defaults and the risk of credit defaults have to do with the general risks of human growth and development? Very little I would say.

Accepting that risk is the oxygen of any development and correcting the current regulatory bias against risk-taking, could only help development, whenever, wherever and in whatever form it occurs.

The World Bank, as the world´s premier development bank has as its prime responsibility to help the world at large to achieve a better understanding of what risk really signifies so that it is able to enter into a more rational relationship with risk.