What the world needs is to introduce true diversity in its financial architecture.

Sir, I refer to “The world needs a new fin­an­cial archi­tec­ture” by Michael Krake, the exec­ut­ive dir­ector for Ger­many at the World Bank.

What if, keeping the UN, World Bank and IMF, we instead reform these institutions? As is, these are managed and governed by bureaucracy autocracies. 

November 2004, at the end of my short two-year term as an executive director in the World Bank, FT published a letter in which I wrote: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions will it take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.”

I had often expressed this at the World Bank Board but, those colleagues who understood what I referred to, and nodded in agreement, could do nothing. How could they, they were nominated by governments and most expected, and needed, to return to the government. What did not exist was real diversity. Not diversity based on gender or race, but diversity based on interests, life experiences and needs. 

Then I often suggested substituting some on the current executive directors with e.g., a plumber or a nurse; or at least to give a place at the board to that migrant community that, by means of its remittances, provided development countries with much more financial assistance than the multilateral financial entities could ever dream to do.

Now 2024, if I had the blessing to again be at that board of directors, I would drive my fellow directors to despair by, over and over again mentioning: “Give me ten seconds, I want to see what my friend ChatGPT opines on this.”

Would, “Without Fear and Without Favour” FT, be willing to publish a letter on what ChatGPT thinks?

http://voiceandnoise.blogspot.com/2006/05/world-bank-needs-to-go-truly-global.html

http://subprimeregulations.blogspot.com/2004/11/some-of-my-early-public-opinions-on.html

@PerKurowski 

Bank capital requirements based on credit risk serves no purpose, based on fighting climate change does.

Sir, Ben Caldecott writes: “The UN’s Sustainable Development Goals and the Paris climate change agreement will be unattainable unless banks finance solutions to these massive social and environmental challenges.” “Banks need a better climate change strategy” July 1st.

The current risk weighted capital requirements for banks are idiotic since these are based on the assumption that what is perceived as risky is more dangerous to our bank systems than what is perceived as safe. But these are also totally purposeless. I do not really favor this type of distortion but there’s no question banks would serve a better purpose if their capital requirements were based, not on credit ratings, but on Sustainable Development Goal ratings.

Obviously such capital requirements would automatically generate “loans that charge lower interest rates to borrowers who meet or outperform sustainability targets” just as the current ones generates lower interest rates to the sovereign and “the safe”, all paid by less and more expensive credit to “the risky”

Of course it would be of utmost importance in that case that the SDG rating agencies are not captured by any of the climate change fight profiteers that abound.

That said, before any climate change fight initiative, including the Paris agreement, what would be most effective is a high carbon tax, with all its revenues shared out equally to all citizens. Why has that not been implemented yet? The simple answer is that because for states that lives on cronyism that is of absolutely no interest.

Sir, if the world is to have a chance to afford successfully fighting climate change, or at least afford to mitigate some of its worst effects, we have to circle all our wagons in an effort to keep out of it all those who are just out to make monetary or political profits.

http://ourpiedaterre.blogspot.com/2015/04/my-proposal-for-this-earth-day-2015.html

@PerKurowski

The developed world, with their statist bank regulators, has no right to preach market reforms to developing countries.

Sir, Jonathan Wheatley writes that in Mexico: “López Obrador — the old-school leftist has pushed ahead with proposals that… have caused alarm among investors, who worry that overspending will call into question the country’s investment-grade credit ratings.”“Delays to reform threaten prospects of emerging economies” March 26.

Sir, López Obrador is not the only leftist in town… in Basel, there are plenty of them.

Basel II assigns a standardized risk weight of 50% to a sovereign rated like Mexico BBB+. This means that the Basel II capital requirement for holding debt of Mexico is 4% (50%*8%). The Basel II standardized capital requirements for lending to any Mexican entrepreneur rated the same BBB+, is 8%. And so, according to the Basel Committee banks are allowed to leverage their capital 25 times their when lending to Mr López Obrador’s government, than when lending to a BBB+ or an unrated Mexican entrepreneur.

So please, do not come and preach us about internal market reforms in developing nations when external global regulators impose such statist and distorting regulations on them.

In 2007, at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled “Are the Basel bank regulations good for development?”. My answer was a clearly argued “No!” But, of course, my chances to be heard by a U.N. Commission on Reforms of the International Monetary and Financial System chaired by Professor Joseph Stiglitz were none.

@PerKurowski

Bank regulators from developed countries kicked away the ladder of risk-taking for the developing ones

Sir, Mohamed El-Erian writes: “the global economy is losing momentum and the divergence between advanced economies is growing… the majority of developed economies are yet to adopt meaningful pro-growth measures”, “Faltering developed world economies raise the risks for equity investors” November 21

Sir, Friedrich List in “The National System of Political Economy” 1885[1]wrote that free trade was the means through which an already industrialized country “kicks away the ladder by which it has climbed up, in order to deprive others of the means of climbing up after it.” 

In a similar way I would argue that the Basel Committee, with its perceived credit risk weighted capital requirements for banks kicked away from the developing countries that ladder of risk-taking that had been the oxygen for helping to get the developed countries where they are.

In 2007 at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I introduced a document titled“Are the Basel bank regulations good for development?”

In it I tried to explain that prioritizing as it does bank lending to the safer present over that to the riskier future is not how a nation can develop.

Sadly, nothing came of it.

But worse, the fact that the developed countries also promote these regulations means they are now reversing their development; and they will also have to confront especially horrible crises… those caused by especially excessive bank exposures to what is ex ante especially perceived as safe, but that ex post turn out risky, against especially little bank capital.

PS. A statement in 2003 as an Executive Director at the World Bank: “Risk aversion comes at a cost - a cost that might be acceptable for developed and industrialized countries but that might be too high for poor and developing ones. In this respect the Bank has the responsibility of helping developing countries to strike the right balance between risks and growth possibilities…. In this respect let us not forget that the other side of the Basel [Committee’s regulatory risk weighted capital requirements] coin m . ight be many, many developing opportunities in credit foregone.”

PS. A 2019 letter to the Executive Directors and Staff of the International Monetary Fund.

God make us daring!

@PerKurowski

[1]List, F. 1885. The National System of Political Economy, translated by Sampson S. Lloyd from the original German published in 1841. London: Longmans, Green, and Company

Climate-change fight profiteers capture governments (and perhaps FT too). Only citizens can really fight climate change.

Sir, you write “The UN issued a stark warning last month on the scale of the challenge, noting that even if governments act on their plans to cut or slow emissions, national pledges so far add up to only a third of the reductions needed to meet the goals of the Paris accord. Negotiators meeting in Bonn this week are supposed to be crafting rules to ensure countries step up their efforts.” “A sharp reality check on the climate challenge” November 15.

Forget it! The Paris agreement was just another great photo-op. If you really want to be able to do what it takes to save our pied-à-terre, you have to keep out the few big green profiteers able to lobby governments (and perhaps You too), and incorporate all the citizens in that quest.

How? Huge national carbon taxes with all its revenues shared out equally to all citizens. The moment a citizen gets a check and is himself turned into a small profiteer of the fight against climate change (and of the fight against inequality) all changes.

Sir, you have published a letter of mine before describing this type of solution, but you might be mightily targeted by those green profiteers too. So beware!

@PerKurowski

Long term growth, development, in India and elsewhere, requires getting rid of Basel's regulatory risk aversion.

Sir, Eswar Prasad writes: “the real question for policymakers in India is not about how they can boost growth temporarily but how to create the environment to elicit private investment. Without that, durable longterm expansion will remain a mirage”, “Long-term growth in India depends on serious reform” October 17.

It is now ten years since at the High-level Dialogue on Financing for Developing at the United Nations, I presented a document titled: “Are the Basel bank regulations good for development?”

Its first paragraph states: “It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope, since risk taking is an integral part of its economic vitality, but it is a real tragedy when developing countries copycats that and falls into the trap of calling it quits.”

And from what I have seen, in terms of Basel’s banking regulations, India is proceeding as if just as papist as the Pope.

The risk weighted capital requirements; those that dangerously distort the allocation of bank credit in favour of what is perceived decreed or concocted as safe, and against what is perceived as risky, like SMEs and entrepreneurs, are still going strong there.

That is the danger of empowering technocrats that are more interested in showing off to colleagues what’s fashionable in Basel than wearing what they should wear back home.

PS. The document referred to was also reproduced in India, in October 2008, in The Icfai University Journal of Banking Law Vol. VI No.4

@PerKurowski

We have jobs because banks risked their (and our parents) money on “the risky”. Let’s give our kids the same chance

Sir, Sarah O’Connor reports on a UN forecast that indicates that “Global youth unemployment has started to worsen again after three years of modest improvement” “Finding work proves harder for world’s youth” August 25.

There are two angles to this story: How to create jobs, and what to do with those who will not get jobs.

With respect to job creation let me remind you, for the umpteenth time, that many of us hold jobs only because banks risked their and our parents money lending to many SMEs and entrepreneurs. And currently, because of the credit-risk-weighted capital requirements for banks, those loans are not available in significant amounts or in competitive rates. Our bank regulators should be ashamed of that as well as those who like you, keep so much silence on this.

And with respect to what to do with those without jobs, there’s no question that as a society it behooves us to at least find them some decent unemployments. For this day by day I become more convinced we need some sort of Universal Basic Income scheme that does not segregate our youth into those with jobs and those without.

@PerKurowski ©

Loony technocrats told countries: “In order for you to develop and grow, your banks must avoid taking risks”

Sir, Professor Angus Deaton writes: “The ‘what works’ agenda also runs of the risk of replacing what (local) people want by what (often foreign) technocrats think they ought to have. It is these unintended consequences that explain why many projects succeed while the country fails.” “There is a solution to the aid dilemma” August 3.

What if one of these foreign technocrats would tell a developing country the following:

"You should require your banks to hold more capital against what is perceived as risky so that it earns higher risk-adjusted returns on its equity on what is perceived as safe, like the government and the financing of houses; and so that they stay away from lending to the risky, like SMEs and entrepreneurs."

With that these foreign bank regulation technocrats would de facto have told a developing country that it must foster risk aversion among its banks. Absolutely crazy! To give a developing country such recommendations is criminally dumb, but that is precisely what the Basel Committee has and is instructing.

Of course these regulations affects developed countries too, as it hinders them from further climbing up the ladder of development, but, in their case, they have at least reached an fairly reasonable height… although that also means the fall could be bigger.

In October 2007, in the High-level Dialogue on Financing for Developing at the United Nations, I protested this regulatory risk aversion... but no one really wanted to listen. 

PS. Let me quote the following from John Kenneth Galbraith’s “Money: “whence it came, where it went” (1975):

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created] 

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

Per Kurowski

How should the UN’s SDGs interact with the enormous demographic challenges now discussed by IMF and World Bank?

Sir, Martin Wolf writes: “a combination of new technological opportunities and new approaches to a deal opens up fresh opportunities… to curb risks of catastrophic climate change” “The upside of addressing climate change” October 28. Let us pray that is so.

But both the World Bank and the IMF, when now in October 2015, they discuss the huge demographic challenges the world face, they also report on a sort of low-tech tool that will seemingly also be helpful addressing climate change, namely lower fertility.

IMF, in its Staff Discussion Note of October 2015, “The Fiscal Consequences of Shrinking Populations” writes: “Declining fertility and increasing longevity will lead to a slower-growing, older world population... This, in turn, contributes to a more sustainable pattern of development and reduced pressures on the environment.”

And the World Bank, in its advance of the “Global Monitoring Report 2015/2016: Development Goals in an Era of Demographic Change” mentions: “Demographic trends and related policies will have implications for the global environment and for the effectiveness of adaptation and mitigation strategies. Family planning and reproductive health policies may help mitigate the negative effects of climate change by reducing population growth, especially in pre- and early-dividend countries. Education is not only likely to lower fertility, it can also have a major impact on the effectiveness of measures aimed at tackling the negative effects of climate change…”

And the UN’s SDGs does include, as Target 3.7, to “By 2030, ensure universal access to sexual and reproductive health-care services, including for family planning, information and education, and the integration of reproductive health into national strategies and programs”

Otherwise the SDGs, except for some minor references, in target 11.2 to the need of improved public transport for older persons, and in 11.7 to providing access to green and public spaces for older persons, seems to completely ignore the demographic challenges IMF and World Bank reports on.

It will be very interesting to see how the SDGs and demography will complement each other and or compete for scarce resources.

@PerKurowski ©

Raghuram Rajan, your own bank regulations are more important to mobilize development funds in India than the World Bank.

Sir, I refer to Victor Mallet’s and James Crabtree’s “Rajan issues call for World Bank and IMF reforms” October 8.

It states that Raghuram Rajan, Indian central bank governor and former chief economist of the International Monetary Fund, gave the example of financial regulations with global reach that would typically be discussed among representatives of advanced economies behind closed doors and presented only at a late stage to those of emerging markets. “Eventually what emerges is a compromise among the advanced countries, even though we’ve been at the table when the final vote is there,” Rajan said.

Not so! Technocratic members of a small mutual admiration club might discuss those financial regulations, but there is nothing to stop Raghuram Rajan to question those regulations openly; and there is nothing forcing India to accept those regulations, except of course that of their own local regulators also wanting to be seen as loyal members of such an exclusive and sophisticated club.

For instance, at the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I questioned bank regulations coming out of Basel, based on the fact that developing countries cannot afford to have regulations that block them from the risk-taking needed in order to develop. And nowhere did I see India or any other developing country lending support to my arguments.

Of course I agree with Rajan supporting the request to increase the capital of the International Bank for Reconstruction and Development, but, for India, and for the financial resources India could mobilize for its development, he has much more important thinks to do.

He could request from the World Bank, as the world’s premier development bank, a clear opinion of how regulatory risk aversion, as currently expressed in risk weighted capital requirements for banks, harmonizes with the needs of developing countries… and even with the needs of developed countries, who also need economies moving forward in order not to stall and fall.

The World Bank has previously expressed some concerns. In its Global Development Finance 2003, in relation to the minimum capital requirements of the Basel II proposals, it stated that these “include the likelihood of increased costs of capital to emerging market economies; and an “unleveling” of the playing fields for domestic banking in favor of international banks active in developing countries”. But why has WB kept silence on it thereafter?

Raghuram Rajan, those risk weighted capital requirements odiously discriminate against the possibilities of “The Risky” to access bank credit in a fair way and, expressed in terms of trade, are just vulgar tariffs distorting the allocation of capital around the world… especially in the emerging and development countries. Do something about that! For a start don’t follow the Basel Committee; it has in fact no idea about what it is doing.

It has deemed the risky SMEs and entrepreneurs, those risky tough ones we must need to get going when the going gets tough, to be the untouchables of the banking sector.

PS. The document I presented at the UN was also published in “The Icfai University Journal of Banking Law” of India in October 2008.

@PerKurowski ©  J

Some comments that I would like to be voiced during the upcoming IMF and World Bank annual meetings 2015 in Peru

Sir, Gillian Tett writes that one of the most important questions the IMF and the World Bank need to tackle during the upcoming meetings in Peru is: “What happens when the emerging market private money goes into reverse” “The credit bubble, the bears and central bankers” October 2.

If I had a voice in that debate I would repeat three comments that I’ve made over and over again for more than a decade, and that until now have been ignored (by FT too).

The first: Any forced deleveraging that might result will unfairly hit the most those who because they are perceived as risky, cause the highest capital requirements for capital scarce banks. And since emerging markets need those “risky” but tough SMEs and entrepreneurs to keep going when the going gets tough, as an emergency measure, they should lower substantially the capital requirements for banks for that type of lending. This by the way is far from being as risky as some could believe. (And this also applies to developed economies).

The second: In a letter published by FT in October 2004 I wrote: “We wonder in how many Basel [bank regulation] propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.” That comment remains just as valid 8 years later.

And so emerging markets must make absolutely sure that access to bank credit of the private sectors, is not jeopardized by giving preferential access to the governments. Anyone who believes government bureaucrats are more capable to use efficiently borrowed funds has plenty of examples to make him change his mind. Look at Greece, look at Venezuela… in fact look at most countries… (And so this also applies to developed economies).

The third: In October 2007 I presented a document at the High-level Dialogue on Financing for Developing at the United Nations titled: “Are bank regulations coming from Basel good for development?” My answer then (and now) was a clear and rotund “NO!” The silly and purposeless risk aversion contained in the pillar of said regulations, the credit-risk weighted capital requirements for banks, make no sense whatsoever for an emerging country, since risk-taking is the oxygen of any development. (And it also equally applies to developed countries that need fresh risk taking in order not to stall and fall).

@PerKurowski

Could a “Vanguard FTSE Social Index Fund” purchase debt of a sovereign like Venezuela, which violates human rights?

Sir I refer to Madison Marriage report in FTfm “Funds in cluster bomb ‘hall of shame’” December 1.

Therein “a spokesperson for Vanguard, which oversees $3tn of assets said:

“For US investors who wish to choose investments based on social and personal beliefs, we offer the Vanguard FTSE Social Index Fund, which excludes companies involved with firearms, tobacco, alcohol, adult entertainment, gambling, nuclear power, or those that violate fair labour practices and equal opportunity standards”.

Holy moly, what a mixture of issues! Questions:

How were for instance adult entertainment and gambling thrown into the same bag as nuclear power and equal opportunity standards?

Have strippers and croupiers not the right to an equal opportunity of seeing their jobs financed?

Considering the Equal Credit Opportunity Act (Regulation B) in the US, are these types of funds really legal?

Has not planet earth right to nuclear power in order to avoid having to more coal that is more dangerous for the environment?

Is there a fund that excludes countries, like Germany, which now are dismantling the use of nuclear power?

In general are there any sovereigns excluded? What about for instance the purchase of Venezuelan debt when the UN Human Rights Chief urges it to release arbitrarily detained protestors and politicians?

As a citizen, more than credit ratings, I would perhaps want to see more use of ethic and good governance ratings.

Is not a failed planet earth worse than a failed bank? Do not hinder banks from financing green growth only because it is “risky”.

Martin Wolf´s “Green growth is a worthwhile goal” November 27, is a non strident account about how the world seems to be entering a very critical stage with respect to climate change, and it just can´t seem to get its act together. And this type of balance approach are much needed since climate change political activists, and rent seekers, are blocking action just as much as extreme climate change skeptics are.

I have no complete solution, but one thing I am certain of. If we are going to stand a chance, we must allow banks to be able to allocate bank credit efficiently to projects which could help us, and not be kept from doing so only because of higher capital requirements based on that these projects could be riskier from a financial perspective.

Let me just give one example. Currently when banks lend to projects like the failed solar panel producer Solyndra, they need to hold much more capital than if they lend to the government so that it in its turn lends to the Solyndras out there. And that does just not make any sense… unless you are a communist off course or in other ways a fanatic believer in the capacity of government bureaucracy.

On a personal level I have been trying to sell the concept that if bank regulators absolutely feel they must distort in order to earn their keep, they should at least align better the incentives to some social purpose. One way would be to allow banks to hold slightly less capital when lending to projects which meet certain sustainability (or job creation) standards.

I have sent out the proposal above to the UN’s Sustainable Development Solutions Network, and I hope it gets there… and is understood there. But since the fact that different capital requirements for banks for different assets distorts the allocation of bank credit in the real economy is not even something debated, I hold no major expectations that will happen.

PS. Sir, just to let you know, I am not copying Martin Wolf with this, as he has asked me not to send him any more comments related to the capital requirements for banks, as he understands it all… at least so he thinks.

Basel regulations are also bad for developed submerging countries.

Sir, Michael Taylor holds that “Basel III is bad news for emerging economies” October 15. He is right and I have been arguing so for years at the World Bank at UN and in many other places, since Basel I and II already contained plenty of bad news.

But what we more recently found out was that these regulations were equally bad for developed countries and which, because of them, have now been converted in submerging countries.

Any bank regulation that penalizes risk-taking so much as to force banks to finance only what is perceived ex-ante as having a low risk of default, belongs only to societies who have called it quits.

Sir, keep your eyes on the ball!

Sir, I agree with every word you say in your editorial “The Word Bank after Wolfowitz” May 19, except perhaps for what could be implied by the title, that of drawing a historical line around one person. The same way that we frequently hear that countries get the president they deserve, perhaps the world has the World Bank it deserves.

What could be done? In my world, if we want good government results that have a chance of doing what is humanly good for humanity, in a shrinking world, that could only happen through more credible and better governed multinational institutions. But in this case, while rolling up or shirtsleeves to get going, we must also learn about how to prioritize our efforts. Instead of beating the good guy on the head, just because he is more amenable to being beaten on the head, and start with a World Bank that no matter Wolfowitz in relative terms still stands out as a shining example of good governance in the world, we should all concentrate more on where good governance is much more lacking and much more needed, namely the United Nations. Sir, may I humbly suggest, you help us keep our eyes on the ball!