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

And good luck to them!

Sir Ms Gail Easterbrook in his letter “Act locally to embed the right attitude to risk” November 17 when referring to giving new regulatory powers to IMF to provide “early warning” of risk to the global economy summarizes it adequately with an “And good luck to them.”

The case for more humility and lower expectations with respect “early warnings” is laid out with crude clarity by the United States General Accounting Office (GAO) in its study of the IMF’s capacity to predict crisis, published in June 2003 (SecM2003-03-734). In it, GAO states, among other things, that of 134 recessions occurring between 1991 and 2001, IMF was able to forecast correctly only 11 percent of them, and that it was similarly bad in forecasting current accounts results. Moreover, when using their Early Warning Systems Models (EWS), in 80 percent of the cases where a crisis over the next 24 months was predicted by IMF no crisis occurred. Furthermore, in about 9 percent of the cases where no crisis was predicted, there was a crisis.

Ms Gail Eastebrook also receives my warmest nod of approval when reminding us that we need to embrace risks and that “without risks there are no rewards”. This is something our financial regulators should have thought upon before they so arrogantly decided to drive risks out of banking, with their minimum capital requirements for banks based on a vague concept of risks of defaults, and that, because it also led the regulators to empower the credit rating agencies, created the current crisis when these lousy pipers led us into the swampland of badly awarded mortgages to the subprime sector.