February 25, 2016

For not questioning the IMF staff sufficiently, Christine Lagarde might, sadly, not deserve her second term

Sir, Vanessa Houlder lauds Ms Lagarde for having “frequently deferred to the fund’s staff in formulating policy” “Lagarde deserves her second term at the IMF” February 25.

That is indeed laudable, but that does not exonerate her from posing the questions that need to be made.

On several occasions I have had the opportunity to ask Ms Lagarde, and IMF staff, about the wisdom of credit risk weighted capital requirements for banks imposed by bank regulators.

Specifically, as an example, here follows two simple question the General Manager of IMF should make and should expect the staff of IMF to answer in unequivocal terms:

Question 1: Why do you think that the risk-weighted capital requirements for banks, which allow banks to earn higher risk-adjusted returns on equity when lending to "the safe" than when lending to "the risky", like SMEs and entrepreneurs, do not dangerously distort the allocation of bank credit to the real economy?

Question 2: If no bank crisis ever has resulted from excessive bank exposures to what was ex ante perceived as "risky", as these have always resulted from too large exposures to what was ex ante perceived as "safe", why do you require a bank to hold more capital when lending to "the risky" than when lending to "the safe"?

If only Ms Lagarde had officially asked those simple questions, not allowing for any type of evasion, then perhaps bank regulations might have look quite differently; and the world’s economy be in a much better shape.

But she, apparently, has not!

PS. For a starter IMF research should try to answer: How many bank loans to SMEs and entrepreneurs have not been awarded worldwide, during the last decade, only because of the risk weighted capital requirements for banks: ten thousands, hundred thousands, millions?

@PerKurowski ©