How can we wean the world off horrendously mistaken bank regulations?

Sir, Robert Zoellick writes: “After seven years of extraordinary governmental stimulus, the world needs a shift from exceptional monetary policies to private sector-led growth… Three possible ways to generate growth stand out for 2016.” “How to wean the world off monetary stimulus” January 19.

Then Mr Zoellick lists: Lawrence Summers’ “big government spending, especially on infrastructure, financed by borrowing at extremely low interest rates”;

Kenneth Rogoff’s “ease debtors’ plights by keeping rates low or even negative, and by restructuring debt, while setting the stage for productive investment”;

Michael Spence’s, and Kevin Warsh’s “emphasise that the demand that will drive private capital investment, which should support higher wages and profits, is expected future demand [so] policies intended to boost demand in the near term can actually discourage business confidence in the future”

And finally “others call for tax and regulatory policies to encourage private sector investment and employment”

I find myself squarely among the latter. Getting rid of that nonsense of credit risk weighted capital requirements for banks would eliminate that distortion that impedes bank credit reaching where it could do the most good, namely to those SMEs and entrepreneurs who most depend on bank credit to lend them the opportunities for helping to move theirs and ours economies forward.

As a member of Civil Society, whatever that now means, at a Civil Society Town-hall Meeting during the 2010 Annual Meetings, I had the opportunity to pose the following question to Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund, and to Robert B. Zoellick, the President of the World Bank:

“Right now, when a bank lends money to a small business or an entrepreneur it needs to put up 5 TIMES more capital than when lending to a triple-A rated clients. When is the World Bank and the IMF speak out against such odious discrimination that affects development and job creation, for no good particular reason since bank and financial crisis have never occurred because of excessive investments or lending to clients perceived as risky?”

I got, not splendid but reasonably good answers from both. Unfortunately, 5 years later very little has been done about how to wean the world off some lousy bank regulations, probably because regulators are more concerned with covering up their mistakes.

PS. In 2011, in the same venue, I repeated a similar question, all to no avail.

@PerKurowski ©

The era of regulatory distortions should draw to a close

Sir, Richard Dobbs and Michael Spence write “The era of cheap capital draws to a close” February 1. Given the current losses, would not this era, in these terms, be more accurately defined by calling it the era of “capital cost postponements”?

Also, given that if banks had been limited to more traditional leverages, we would never had seen the credit expansion that occurred, was it really cheaper capital we saw or was it not an era of regulatory distortions?

It was arbitrary regulatory discrimination which caused bank credits to be relatively very cheap for anything that could dress itself up to be perceived as low risk, as bank equity could then leverage more than 60 to 1, and relatively much more expensive for what could not do so, and for which bank leverage was kept to a 12 to 1. That is what pushed the world into financing houses in the US and other “safe” places and away from infrastructure and machinery and other “unsafe” ventures.

If there is anything we should ask for now, that is for the financial regulators to immediately stop acting with such hubris as the risk-managers of the world.

Stop following Basel and the Fund into the land of the guaranteed systemic risks

Sir, Mohamed El-Erian and Michael Spence in “The Fund needs to refocus its agenda to be relevant” August 7 seems to suggest that the International Monetary Fund turns itself into a merchant bank type institution “facilitating the ongoing breakout phase in the economic development of emerging countries”. Before branching out into private sector terrain the Fund would do well not by refocusing but by focusing more on what is its current agenda.

For instance the IMF needs to be much more certain about what long terms effects there could be for the world of having promoted so much the idea of their buddies in the Bank of International Settlement in Basel with respect of ordering so much of the financial markets to follow the criteria of a few credit rating agencies. The developed world, with their current subprime mortgaged backed securities mess, is already getting some quite horrifying glimpses of what might lie ahead if it persists in following Basel and the Fund into the land of the guaranteed systemic risks.