March 26, 2013
Sir, Michael Pettis, in “Why the world needs reckless bankers” March 26 writes: “Long-term wealth creation accrues most to societies in which the financial system most willingly funds risk-taking entrepreneurs. But the more a financial system is willing to finance risky new ventures, the greater the likelihood of banking instability”.
I agree with the first part, and that is why in our churches we often sing “God make us daring!”
But with the second part Pettis describes a false dilemma, since all bank crises, with the sole exceptions of when fraud is present, have never resulted from excessive exposures to something considered as “risky new ventures” but always from excessive exposures to something erroneously considered as “absolutely safe”.
And so what we most need is to send to their homes, in disgrace, those Basel Committee bank regulators who came up with the silly capital requirements for banks based on perceived risks already cleared for… and thought that they with their “more-risk-more-capital less-risk-less-capital” had it all solved. They only doomed the banks to dangerously with little capital overpopulate the safe havens, and to avoid like never before the “risky" new ventures.
And when Pettis asks for more brutal and ruinous competition among banks I could not agree more. In May 2003, as an Executive Director of the World Bank I told regulators during a workshop on Basel II: “a regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”