The Sustainable Development Goals seem all very laudable, but given that bank credit is one of the most important financial resources, in order for these to stand a fair chance of being met, one would have to kick out all current bank regulators… or at least their regulatory pillar, the credit risk weighted capital requirements for banks.
Hear me out!
Those capital requirements, where capital mostly signifies bank equity, decree more credit risk more capital – less credit risk less capital. That might sound logical, but it is not!
That means that banks are allowed to leverage more their equity (and the various sort of support they receive from taxpayers) when lending to what is perceive as safe than when lending to what is perceived as risky; which means banks can earn higher risk-adjusted returns on equity when lending to The Safe than when lending to The Risky; and which makes it impossible for banks to treat all borrowers fairly.
Those capital requirements, where capital mostly signifies bank equity, decree more credit risk more capital – less credit risk less capital. That might sound logical, but it is not!
That means that banks are allowed to leverage more their equity (and the various sort of support they receive from taxpayers) when lending to what is perceive as safe than when lending to what is perceived as risky; which means banks can earn higher risk-adjusted returns on equity when lending to The Safe than when lending to The Risky; and which makes it impossible for banks to treat all borrowers fairly.
Specifically those bank regulations, which only single purpose is to avoid credit risk, something which has nothing to do with financing sustainability, poverty reduction or job creation, would directly impede the following SDG-Targets
1.4: ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources
1.5.a: Ensure significant mobilization of resources from a variety of sources….
2.3: equal access to… financial services…
8.3: Promote development-oriented policies that support productive activities, decent job creation, entrepreneurship, creativity and innovation, and encourage the formalization and growth of micro-, small- and medium-sized enterprises, including through access to financial services
8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all…
9.3: Increase the access of small-scale industrial and other enterprises, in particular in developing countries, to financial services, including affordable credit, and their integration into value chains and markets
10.3: Ensure equal opportunity and reduce inequalities of outcome, including by eliminating discriminatory laws, policies and practices and promoting appropriate legislation, policies and action in this regard
15.10.a: Mobilize and significantly increase financial resources from all sources to conserve and sustainably use biodiversity and ecosystems
15.10.b: Mobilize significant resources from all sources and at all levels to finance sustainable forest management and provide adequate incentives to developing countries to advance such management, including for conservation and reforestation
17.1: Strengthen domestic resource mobilization
17.3: Mobilize additional financial resources for developing countries from multiple sources
You might say that to ignore such capital requirements would put the banks at risks. Forget it! Major bank crisis do never result from excessive exposure to what is perceived as risky, these always, no exceptions, result from excessive exposures to what was erroneously perceived as safe.
Motorcycles are much riskier than cars, but much more people die when going in cars than when riding motorcycles.
If we do not want banks to take risks in order to create jobs, in order to reduce poverty and in order to help the sustainability of earth… then what the hell do we want banks for… safe mattresses would do.
I am not much for distorting credit allocation in any way, I believe it is way too arrogant for us to pretend we know how, but, if we have to do it, I would much prefer allowing banks to hold a bit less capital when lending to something related to the SDGs, so that they make a bit more return on equity when lending to the SDGs, so that they lend a bit more to the SDGs.
Motorcycles are much riskier than cars, but much more people die when going in cars than when riding motorcycles.
If we do not want banks to take risks in order to create jobs, in order to reduce poverty and in order to help the sustainability of earth… then what the hell do we want banks for… safe mattresses would do.
I am not much for distorting credit allocation in any way, I believe it is way too arrogant for us to pretend we know how, but, if we have to do it, I would much prefer allowing banks to hold a bit less capital when lending to something related to the SDGs, so that they make a bit more return on equity when lending to the SDGs, so that they lend a bit more to the SDGs.
Let me finalize here by quoting from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.
“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is.”
