Wednesday, October 8, 2014

Is this good for developing countries? (or even for developed ones?)

Many developing countries, because their government bureaucrats do not want to seem less sophisticated than their counterparts in the developing countries, have adopted the Basel Committee for Banking Supervision as expressed in Basel II and soon Basel III.

The pillar of those Basel regulations is something called credit-risk weighted capital (equity) requirements for banks, more risk more bank equity – less risk less bank equity.

And that allows banks to earn much higher risk-adjusted returns on equity on what is perceived ex ante as “absolutely safe” than on what is perceived as “risky”.

Questions: Do you think developing countries can develop by giving the banks incentives to populate safe-havens, possibly causing a dangerous overcrowding of these, and keeping away from exploring the risky bays? Is not risk-taking the oxygen of development? Do you think that developed countries can stop taking risks and not stall and fall?

A ship in harbor is safe, but that is not what ships are for.” John Augustus Shedd, 1850-1926