January 17, 2018

The risk weighted capital requirements for banks close way too many development doors.

Sir, Martin Wolf referring to the World Bank’s latest Global Economic Prospects writes: “A slowdown in the potential rate of growth is affecting many developing countries. This is not only the result of demographic change, but also of a weakening in productivity growth. They need to tackle this urgently.” “Recovery is a chance for the emerging world” January 17.

Sir, during my two years as an Executive Director of the World Bank, and with respect to the Basel Committees’ bank regulations, I continuously argued for the need to maintain “an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth.”

At the High level Dialogue on Financing for developing I presented a document titled “Are Basel bank regulations good for development?” which I answered with a clear NO!

In 2009 Martin Wolf, in his Economic Forum allowed me to publish “Free us from the imprudent risk aversion and give us some prudent risk-taking”.

And in hundreds sites more, among other with over 2600 letters to FT, I have argued about the horrible mistakes of the risk weighted capital requirements for banks present, not just for developing countries but also for developed ones.

The distortion these produce in the allocation of bank credit in favor or what is perceived or decreed as safe, sovereigns, AAA rated and mortgages, has impeded millions of “risky” entrepreneurs around the world to gain access to bank credit, thereby hindering much new productivity.

And those regulations will not bring us stability, much the contrary.

So the first thing to do to allow what Wolf wants, “greater entrepreneurial effort, more competition, higher investment and faster improvements in productivity”, is the elimination of risk weighted capital requirements for banks.” But Martin Wolf will most probably not agree, because how could he?

Sir, and as I have told you umpteenth times those regulations will not bring us stability, much the contrary.

PS. Look for instance at houses. What would the price of a house be if there was no financing available to purchase these? Of the current price of houses how much is represented by the intrinsic value of the house, and how much is a reflection of all one-way-or-another subsidized financing allocated to that sector? The sad truth is that our society has ended up financing the financing of houses. When all that low risk weighted mortgaging comes home to roost in a subprime unproductive economy, it will be hellish.