Sunday, April 19, 2015

The Development Committee Communiqué, April 2015. Another missed opportunity to make a real difference

The Development Committee (DC) is a ministerial-level forum of the World Bank Group and the International Monetary Fund for intergovernmental consensus-building on development issues. Its mandate is to advise the Boards of Governors of the Bank and the Fund on critical development issues and on the financial resources required to promote economic development in developing countries.

In its Communiqué after the 2015 Spring Meetings in Washington on April 18, 2015 it included the following:

“We call on the World Bank Group (WBG) and the International Monetary Fund (IMF) to support countries’ efforts to spur inclusive growth and job creation and build resilience to adverse shocks, in order to reduce poverty, and enhance shared prosperity in a sustainable manner, and protect hard-won gains in these areas.”

And I have to ask: Why on earth can they not ask the Basel Committee for Banking Supervision (BCBS), the committee that designs bank regulations to be applied for banks around the globe, the same thing?

As is, the pillar of BCBS’s bank regulations is risk-weighted capital requirements for banks, or more precisely portfolio invariant credit-risk-weighted equity requirement for banks. And this has nothing to do with “inclusive growth and job creation and build resilience to adverse shocks”.

On the contrary, since it translates into less-risk-less-equity, and since all major bank crises in history have never resulted from excessive exposures to something perceived as risky but always from excessive exposures to something erroneously perceived as safe, it only set up the banking system to even larger adverse shocks.

Also, since it of course also translates into more-risk-more-equity it means that banks will lend less and relatively more expensive to the “risky”, like SMEs, something which kills opportunities and thereby foments more inequalities. 

In short the Development Committee should have taken the opportunity to ask BCBS to substitute for the credit-risk-weights with something more purposeful for the society. For example with the potential of planet earth sustainability, job generation and poverty reduction weights.

And indeed, since risk-taking is the oxygen of any development; and it is the future generations who most need banks to take astute risks in order for them to have a better future, the World Bank should be instructed to act as the Ombudsman for the best interests of our children and grandchildren.