We most need to seek local solu­tions to local issues

Sir, I refer to Dani Rodrik’s “We should seek local solu­tions to global issues” FT October 16, 2025. He favors “Instead of top-down reg­u­la­tion and con­ven­tional sub­sidies, rely on open-ended col­lab­or­a­tion between pub­lic agen­cies and private act­ors.”

I fully agree with what's first mentioned, but I’m not so convinced about the what-to-do part; the documented track record of such collaborations is, except for some interested private actors, not that marvelous. Much more needed is to allow local non-governmental market solu­tions to local issues.

I had studied high school and university in Sweden so, after getting my MBA at IESA in 1974, I decided to travel around Venezuela for a full year, harvesting rice, sorghum and sunflowers. That in order to get to know my country better and, truth be told, to try to salvage an investment going sour.

That year left many indelible impressions and, among these, of the importance of banks in small cities and communities e.g., Calabozo. The presence of a local bank or of a branch loan officer from one of the larger banks, allowed local bankers to identify and respond directly to the needs of local farmers, small businesses and entrepreneurs.

Over the years little by little that all started to disappear before my eyes when many local banks, much to please the status seeking of its shareholders and directors, began to consolidate with the Big, or established their main office in the capital.

1988, with the Basel Committee’s risk weighted bank capital requirements, if colloquialisms are allowed, shit hit the fan.

By decreeing risk weighted bank capital requirements (insanely) based on that what’s perceived as risky is more dangerous to bank systems than what’s perceived or decreed) as safe, banks had to hold much more capital/equity against e.g., loans to small town businesses.

Out went the loan officers (like your George Banks who went to fly a kite) and in came the dangerously creative bank financial engineers... capable of expulsing the risks into the shadows. 

As I was not from the public sector, had in fact been quite critical of it, even before Hugo Chavez, strange circumstances and coincidences had me end up as an Executive Director at the World Bank, 2003/04. There I did what I could to voice my concerns, especially during the discussions of Basel II.

Not much luck in having these echoed… not there… not with Academia and not with the many NGOs purporting they defend the interests of developing countries. 

Why? I guess there is not too much interest and consultancy profit in banks of Calabozo and alikes

Fast forward to August 29, 2025. That day I asked both Grok and ChatGPT; “What is the impact on small cities of the risk weighted bank capital requirements?”

https://subprimeregulations.blogspot.com/2025/08/ai-grok-what-is-impact-on-small-cities.html

https://subprimeregulations.blogspot.com/2025/08/ai-chatgpt-what-is-impact-on-small.html

Sir, do you think the regulators will read and acknowledge AI’s answers?

PS. Here The document that I presented at the High-level Dialogue on Financing for Developing at the United Nations 2007.

@PerKurowski

Dodd-Frank rollback on mortgages heralds even higher house prices and even less financing of job creation.

Sir, I refer to Barney Jopson’s and Ben McLannahan’s “Dodd-Frank rollback heralds mortgage push” May 17.

Because of the risk weighted capital requirements bank credit is geared to finance what is perceived or decreed as presently safe, like houses and the government, and to stay away from financing the “riskier” future, like entrepreneurs.

Of course I am glad for “a bill aimed at giving small banks relief from post-crisis reforms that had driven them out of parts of the market” so to give these some “more opportunity [to] offer mortgages to folks we know”

I just wish the roll back had meant the risk-weighted capital, so to incentivize small and big banks to give more credit opportunities to entrepreneurs, in order to give “folks we know” more chances of finding the jobs that will help them to service their mortgages and utilities.

PS. One very needed research is on how much of current house prices are the result of regulatory or other subsidies to the financing of mortgages. When now buying a house, how much might we currently have to finance because of the financing of all other purchased houses? 

@PerKurowski

Some are unfortunately the “Too Small To Be Invited To Basel Or Davos Banks”

Sir, Tracy Alloway reports on that “New rules hit small US banks ‘hardest’” February 9. She is right, but this has been since the imposition of credit-risk-weighted equity requirements, because:

Small banks, compared to big, attend proportionally much more the borrowing needs of clients who are perceived as “risky”, like local small businesses and entrepreneurs.

Small banks, compared to big, find it more difficult to engage in that financial sophistication, whether real or pseudo, used to dress up balance sheets as safer.

And therefore small banks, compared to big, must usually hold proportionally more equity, which makes it more difficult for these to produce competitive returns for their shareholders.

The small banks and their “risky” clients are never invited to discuss their problems with the Basel Committee or the Financial Stability Board…they are too small to be able to adequately feed the ego of regulators.

Small banks are never invited to Davos, as neither are their small “risky” clients.

Most certainly Martin Wolf did not explain to Edmund Phelps how bank regulations are stacked against small banks and their clients.

Sir, Martin Wolf’s lunch with Edmund Phelps ends with Phelps saying “I would like to see the American economy go back to small banks rooted in communities where the banks know something about the local start-ups” "A romantic economist?" June 14.

Unfortunately Professor Phelps, that is impossible, because regulators have structured modern banking around the concept that those who are primarily to know the clients of the banks are not the bankers, but some credit rating agencies. And if by any chance the small bank would try to get to know his local client, and decided to trust him with a loan, then it would be required to hold much more capital since the Basel Committee seemingly believes that anything small and local has to be very risky.

Sir, most certainly Martin Wolf did not explain anything of this to Phelps, since he clearly thinks that this is of absolutely no importance.

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.