I hope David Malpass, nominated by USA, if confirmed as president of the world’s premier development bank, understands that risk-taking is the oxygen of all development.

Sir, Robert Zoellick writes: “If policymakers overlook the experience of developing countries during the crisis, they are less likely to consider emerging market dynamics, understand developing economies’ sources of resilience and appreciate vulnerabilities” “Who ever runs the World Bank needs a plan for emerging markets” February 6.

Of course no one should overlook experiences obtained during crises but, focusing excessively on these, puts a damper on the potential growth between the crises.

In his book “Money: Whence it came, where it went” (1975), John Kenneth Galbraith, referring to the accelerated growth experienced in the western and south-western parts of the United States during the 19thcentury, argued that it was the result of an aggressive banking sector working in a relatively unregulated environment. “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

For instance when banks are required to hold more capital when lending to their “risky” entrepreneurs, than when lending to their “safe” sovereign, as current Basel regulations mandate, that is bad enough in developed countries, but, in developing/emerging countries, it is absolute lunacy.

While an Executive Director in the World Bank 2002-2004, a time during which Basel I was discussed I did what I could to alert to the huge mistakes of its pillar, the risk weighted capital requirements for banks. Unfortunately I was not able to convey my warnings, and these were approved in June 2004.

I hope that David Malpass, now nominated by USA, if confirmed as the next president of the World Bank, fully understands the following:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements impede banks from taking efficiently the risks that are needed to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd.

Second, that what’s perceived ex ante as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large bank exposures to what is especially perceived (or decreed) as safe, against especially little bank capital.

God make us daring!

PS. Here is a brief summary of what I had to say on this issue before and during my term as an ED. It includes two letters published by FT

@PerKurowski

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 survival of Spain and Italy (and Portugal) is day by day being more in the hands of their respective shadow economies, their respective economia sommersa

Sir, no matter where you look in the developed world, you will find dangerous obese bank exposures to what was or still is officially perceived as absolutely not risky, like what was or is triple-A rated and the “infallible” sovereigns; and for the society equally dangerous, anorexic bank exposures to what is officially perceived as risky, like small businesses and entrepreneurs. Nevertheless the bank regulators insist on discriminating against ex-ante perceived risks. 

In this respect, when Robert Zoellick in “Europe is distracted by endless talk of firewalls” April 17, writes that “the survival of the eurozone now depends on Italy and Spain”, but, instead of trying to figure out how their private banks could help out, he recommends a minor capital injection in the European Investment Bank, I can´t help but to feel that the real survival of Italy and Spain (and Portugal) will, in its turn, depend on what the Italians and Spaniards (and Portuguese) can manage to do in their more real and less distorted shadow economies... their respective economia sommersa.

PS. That is specially so when in the official economy regulators apply perceived credit risk weighted bank capital requirements, which so much favors the access to credit of the sovereign over that of entrepreneurs and SMEs.

Gold-bugs are preferable to house-bugs

Sir I cannot understand all the uproar about Robert Zoellick, the World Bank president´s recent comments on gold, “The G20 must look beyond Bretton Woods” November 8.

Sincerely, what is the difference between “employing gold as an international reference point of market expectations” and all that recent rhetoric on the need to measure and avoid assets bubbles? Gold, being movable, should be a more adequate asset to transparently measure market expectations than houses. Gold is allowed to fluctuate up and down, while falling house prices are fought against as if it signifies the end of the world, even though, rationally… what´s wrong with lower house prices?

I much rather have gold-bugs than house-bugs.

FT, for the umpteenth time, it was not deregulation it was bad regulation.

Sir, in “A fresh approach” October 4 you write: “The recent global crisis, also rooted in an excessive faith in deregulation, removed any vestigial credibility from the view that markets always work best when left to themselves”.

I am amazed. Do you not yet know that this crisis was provoked directly by regulations which allowed banks to leverage their equity 62.5 times to 1, or more, when investing or lending to anything related with a triple-A rating? Is this what you call deregulation? I just see it as extremely bad regulations. Do you truly believe the markets would have allowed banks to leverage the way they did if left on their own design? Of course not! Just look at how they keep the unsupervised hedge funds in a much tighter leash.

Mr Zoellick, as the president of the World Bank, has an even more important issue to bring up in Pittsburgh.

Sir Robert Zoellick, the president of the World Bank, makes an inspired call for that “Pittsburgh should be a turning point for the poor” September 24, 2009.

Sadly, and though it should be the prime responsibility of a development bank to draw the attention to the issue, he completely ignores to mention that current bank regulations introduce an arbitrary regulatory bias in favor of the rich and the developed, and against the poor and the developing. This is so because the capital requirements are based on perceived risk of defaults as measured by credit rating agencies, and we all know where these perceived risks tend to live.

For example if a bank lends to an AAA rated sovereign it is currently required to hold zero percent in capital and if lends to an AAA rated private corporation only 1.6 percent, but when lending to a BB+ to B- rated sovereign or any unrated corporation it is required to hold 8 percent in equity. The significant different costs derived from these regulations, are to be added or deducted from what the markets would normally charge for financing different risk levels, and as a result these arbitrary regulatory interferences only makes the differences wider.

The World Bank should be the first one interested in putting on the agenda the fact that the world could have been better place had not some bank capital requirements empowered the credit rating agencies so much so that with their AAA could, over just a couple of years, mislead trillions of dollars over a precipice of financing a basically useless house price boom in the US.

The World Bank should also be the first one to remind the world of the fact that risk-taking is indeed the oxygen of any development and that therefore taxing it can prove truly disastrous for the world.

When in Rome, do not try to see every attraction but do not miss what has to be seen either

Sir Robert Zoellick making reference to a meeting among world leaders in Rome prescribes “A 10-point plan for the food crisis” May 30. That plan is somehow confusing in that it mixes immediately needed actions, the first three, that of fully funding the World Food Programme’s emergency needs; the support of vital safety nets and facilitating the access to seeds and fertilizers in poor countries, with other seven points, on some of which there is even an ongoing debate about whether they are right or wrong, like for instance whether to step up ethanol production from sugarcane, which consumes a disproportionate amount of water.

Since this food crisis relates more to economic growth and energy related than to unforeseen weather disasters, and there are many official watchdogs like the International Energy Agency, the Consultative Group on International Agricultural Research, even the World Bank, supposed to keep their eyes open, my suggestion of an 11th point, I believe far more important those point 4-10 suggested by Zoellick, is to figure out why world has been so taken by surprise with this food crisis and what can be done to improve the foresight.