June 03, 2015

Mark Carney and Bertrand Badré, if sincere, should be concerned with the abandonment of the vulnerable “risky”

Sir, Mark Carney, chairman of the Financial Stability Board, and Bertrand Badré, the chief financial officer of the World Bank Group write: “The financial abandonment of whole groups of customers — or even countries — is not something that can be ignored by the members of the G20. The FSB and the World Bank are playing our part in co-ordinating efforts to prevent the loss of basic banking services needed to finance investment in some of the most vulnerable areas in the world… if legitimate institutions cannot channel funds between countries through a well-regulated financial system, money will instead circumvent the official channels.” "Do not shut out vulnerable from banking" June 3.

They refer mostly to anti-money-laundering regulations but the truth is that the moment regulators confused bank assets perceived as risky with banks assets being risky, and concocted credit-risk weighted capital requirements for banks, then they abandoned all vulnerable “risky” borrowers, who could then no longer count with fair access to bank credit.

The World Bank’s Global Development Report 2003 (GDR-2003), commenting on Basel II, had the following to say: “The new method of assessing the minimum- capital requirement is expected to have important implications for emerging-market economies, principally because capital charges for credit risk will be explicitly linked to indicators of credit quality, assessed either externally under the standardized approach or internally under the two ratings-based approaches. The implications include the likelihood of increased costs of capital to emerging-market borrowers, both sovereign and corporate; more limited availability of syndicated project-finance loans to borrowers in infrastructure and related industries; and an “unleveling” of the playing field for domestic banks in favor of international banks active in developing countries…A recent study by the OECD (Weder and Wedow 2002) estimates the cost in spreads for lower-rated emerging borrowers to be possibly 200 basis points.”

As an Executive Director in the World Bank (2002-04) I did what I could to fight this odious regulatory discrimination against those already being discriminated against by the banks, precisely because they are perceived as risky. I found no resonance whatsoever… and whatever little World Bank criticism was present in the GDR-2003, has seemingly been abandoned.

If Mark Carney and Bertrand Badré are really sincere, this is where they should start.

Bank nannies can worry about perceived risks and dirty fingernails. Bank regulators should mostly concern themselves with distortions and illusions of safety. Much more than safe banks we need functional banks.

PS. And, whatever you do, banks are much too important for us to allow these to be exploited as combustible material by interested politicians.