Friday, November 16, 2012

Dear development organization

Current bank regulations, which are being imposed globally, have as their principal pillar that of capital requirements based on perceived risk; the more the risk the higher the capital, the lower the risk the lower the capital. That, although at first it sounds logical is something extremely dangerous for the economies, because the perceived risks are already cleared for, by banks and markets, through interest rates, amounts of exposures and other contractual terms. 

The result of those regulations which double-count perceived risks, is that banks are able to earn much higher risk adjusted returns on equity when investing in or lending to “The Infallible”, than when investing in or lending to “The Risky”, like small businesses, entrepreneurs and most infrastructure and development projects. 

That of course makes it much more difficult for “The Risky” to access bank credit, or forcing them to accept much higher interest rates, much smaller loans and much harsher terms than would have been the case without these regulations. 

In this respect I wonder if your organization, so much involved in the development efforts of the world, and that must be aware of the fact that risk-taking is the oxygen of any development, has any interest in supporting my efforts to eliminate these regulatory subsidies to “The Infallible”, and the consequential taxes on The Risky”. 

Our banks are currently drowning in dangerous excessive exposures to what is officially considered as “The Infallible”, while credit needs for so many productive projects of “The Risky” are completely ignored.

Yours sincerely 

Per Kurowski 

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