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”