The Basel Committee blocks development

I refer to Aleksandr V Gevorkyan’s “Small economies require new development model” November 5.

What would FT opine on a development model that include bank regulations based on:

1.- Bureaucrats know better what to do with credit than entrepreneurs; 

2.- It is better to refinance the safer present than financing the riskier future, and 

3.- Residential mortgages are more important than small business loans?

I ask because that’s precisely what the credit risk weighted bank capital requirements ordain, those globally marketed by the Basel Committee and capital minimizing/leverage maximizing financial engineers.

Do you really think the developed world would have been able to develop as much with those regulations? Is not risk-taking the oxygen of all development?

On another topic Gevorkyan mentions “involving the entrepreneurial and investment potential of the large expatriate community (diaspora) that is now a feature of most small economies.” Absolutely but, let us not ignore the sad fact that in many countries it is the family remittances that help to keep in power the governments that caused the diaspora to have to emigrate.

PS. At the High-level Dialogue on Financing for Developing at the United Nations, New York, October 2007, I presented a document titled “Are the Basel bank regulations good for development?” Fourteen years later, that question is still not discussed

Britain, Martin Wolf, how can you walk tall with banks who have been instructed to behave as wimps?

Martin Wolf holds that “Britain can only walk tall if productivity is reignited” March 20.

To “walk tall” means to be brave and self-assured. Sincerely how on earth can Martin Wolf believe that Britain could walk tall or regain productivity with wimpy regulators who tell banks to go an make their highest risk adjusted returns on equity with assets perceived as safe and to stay away from assets perceived as risky?

Wolf refers rightly to problems inherited by the financial crisis but still phrases it as a consequence of a widely shared “overconfidence in finance”… which shows he still does not get it.

When you impose credit-risk-weighted equity requirements on banks it is clearly not a sign of confidence but a sign of a lack of confidence. You are in essence telling the banks “We do not trust you to assign to the credit risk you perceive sufficient importance to clear for these in the size of your exposures and with the risk-premiums you charge… so we are also going to clear those credit risks for you in your equity.”

And Wolf also keep on referring to the need of less fiscal austerity, especially as “government is able to borrow at sub-zero real rates of interest” blithely ignoring that with the Basel Accord of 1988 banks were allowed to lend central governments against zero equity while, when lending to the private sector they needed to hold 8 percent of it.

Thus government borrowing costs became subsidized in a very nontransparent way… and the cost of that subsidy is paid by the lower productivity that results from the misallocation of bank credit.

But what do you mean Kurowski with banks not taking risks, have you not seen the disaster they caused?

Indeed I have, and all their problems were caused by excessive exposures to what was perceived as safe, by bankers and regulators alike, and could be held against very little equity. That to me is more a sign of excessive risk-aversion than of excessive risk-taking.

@PerKurowski

Failures and mistakes is something that needs to be nurtured in order to have a better future.

Sir, Gillian Tett is absolutely correct when she writes: “What is still missing, in many quarters, is a mindset – most notably a recognition by bureaucrats and bankers that failure is an inevitable part of the market system, and that it sometimes pays to wipe the slate clean rather than endlessly sweep problems under the carpet”, “Jingles that sound the beginning of recovery” October 24.

That is exactly what I referred to in a letter you published in August 2006 in which I wrote about “the long-term benefits of a hard landing” and the dangers of dabbling in topics such as debt sustainability ignoring the value of pruning or even, when urgently needed, of a timely amputation.”

But, I also think it is very important that the wiping-the-slate-clean, also applies to banks. As an Executive Director of the World Bank, in 2003, I told many regulators during a Basel II preparation conference: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises.”

But no, the Basel Committee preferred to proceed down the road of nurturing the too-big-to-fail banks.

PS. By the way, Ms. Tett might be interested that in the US, the jingle she refers to, is not allowed when it comes to educational debt.

Why does Ms. Tett value risk-taking here, but not there?

Sir, Gillian Tett describes how her life was saved by some daring physicians in Singapore, “How Singapore remains healthy” June 8. She also comments that, had she’d been in the USA, because of litigation risks, the doctors might perhaps not have dared to performed a risky “antibiotic gamble”.

How strange then that she has not really understood, or wants to accept, that bank regulators should not, as they do now, favor risk-avoidance, to such a degree that what is safe might become risky, while discriminating against what is perceived as risky, even if those are the ones who, living on the margins of the real economy, we most need to have access to bank credit in fair and efficient terms. Might there be an anthropological explanation for it?

It takes bungee jumping to get us out of this, so please let those wanting to risk it jump!

Sir, I refer to Martin Wolf’s “We still have that sinking feeling” July 11. 

That is nothing to be surprised about, in an economy where governments and central banks pour fiscal deficits and liquidity on it, while simultaneously bank regulators impede bank lending to basic economic engines like small businesses and entrepreneurs, just on account of these being perceived as “risky”. Containing the indispensable risk-taking is pure and unabridged assisted suicide of the economy. 

And Wolf comments again on deleveraging, but seems not able to understand the fact that the economy is more underleveraged than ever on what is originally perceived as risky, something which is of course quite different from an over-leverage to what was perceived as absolutely not risky but then turned into risky. 

Stop wasting time on important but completely secondary issues, like manipulative Libor settings, excessive bonuses and what have you, and start acting urgently on allowing the risk-takers take the risks we all depend on.

If you temporarily lower the capital requirements for banks when lending to small businesses and entrepreneurs, by for instance 50 percent, the banks will NOT build up excessive exposures to these, because bankers never do so to something they perceive as risky, then you would at least allow some of the willing risky risk-takers to start helping us risk-adverse citizens.

India, whatever you do, do not forget that risk-taking, not risk-aversion, is the oxygen of development.

Sir, Martin Wolf in “Crisis must not change India’s course”, February 8, would perhaps like to make clear to his green readers that when he writes “India can generate rapid growth by catching up on the world’s richest countries, almost regardless of the global environment” that it was not that “global environment” he was referring to. 

Wolf then recommends carefully watching the financial system and adopting the emerging global norms, because “Huge crisis may be socially manageable for high-income countries. They would be grossly irresponsible for a country like India”. I completely disagree. 

Global banking norms, which have emerged in the developed world, are designed to encourage banks to invest in what is not risky, completely ignoring the efficient capital allocation purposes of a bank, and that, though sad and not good, might be something acceptable for a high-income country that wants to hold on to what it’s got, is completely unacceptable for a poor developing country. 

A country like India cannot afford to forget that the cost of keeping its banks safe could be much larger than a bank crisis, because of all the developing opportunities foregone. Someone ought to have asked Mr. Wolf how his country developed and what banking norms were in place in his country before the current ones.

Risk-avoiders can huff and puff but they depend on risk-takers.

Sir, Martin Wolf’s “Creditors can huff and puff but they depend on debtors” November 2, is a great expose on the Janus-faced realities of deficits and surpluses, and also of the too-much-lending and the too much borrowings. 

I just wish Mr. Wolf, and so many with him, could get to understand that precisely the same relation exists between safety-and risk-taking. If the world does not take risks it will not be safe. On the contrary by interfering with their risk-weights based on what they perceived as not-risky they pushed the world into one of the greatest economic crisis ever. 

There is something fundamentally wrong when, for instance a UK bank, is required to have 8 percent in capital when lending to a UK small businesses or entrepreneur, but is (or at least was) allowed to have only 1.6 percent when lending to a sovereign rated like Greece was, which has absolutely nothing to do with the credit rating of Greece being correct or not. 

It really amazes me that Mr. Wolf does not see that risk-avoiders can huff and puff but they depend on risk-takers.

We do not need bold stability, we need bold risk-taking!

Sir, Barry Eichengreen and Raghuram Rajan in “Central banks need a bigger and bolder new mandate” October 25, write “Financial stability must become an explicit objective of central banks, along with price stability” and I just must ask… what is so bold about that? 

The authors also opine the world has been rethinking bank regulations to make economies more stable and that has clearly not been the case. Basel III like Basel II is built upon the pillar of capital requirements for banks that discriminate based on ex-ante perceived risk and it was precisely that which caused this crisis by means of giving the banks those fabulous incentives that led to the buildup of so dangerous excessive exposures to what was ex-ante perceived as not risky. 

No what we need is bold rethinking which starts by asking Central banks and bank regulators to dare to tell us what they believe the purpose of our banks is… since nowhere is that to be found. 

The Western World became what it is based a lot on the willingness of banks to take risks… and especially when the going gets to be risky as now and we need our risk-takers, like small businesses or entrepreneurs to get going, we cannot allow some nannies to turn our banks into veritable wimps in the name of some misunderstood quest for stability.

What we need is to pay bonuses for the right kind of risk taking!

Sir the world is definitely confused. Lucian Bebchuk writes “Regulate financial pay to reduce risk-taking” August 4 even though as a Harvard professor he should now that we as a society need risk-taking if we are going to move forward, and so the issue should obviously be more that of regulating financial pay so as to promote the right kind of risk taking.

Also let us stop from hiding the truth. Had the regulators not created the risk arbitrage opportunities derived from the minimum capital requirements and their excessive trust in the credit rating agencies billions of temporary artificial profits would not have been generated and with that there would have been so much money to pay the bonuses to begin with.