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.

We need capital requirements for banks based on saving our planet and creating jobs ratings

Sir, Jeffrey Sachs writes “the system of financial intermediation is broken” and therefore the financial needs for the many infrastructure investments required to face climate change challenges, cannot be satisfied. “We risk more Haiyans if we ignore climate change” November 17.

I agree. For more than a decade I have argued that capital requirements based on perceived risks, only distorts the allocation of bank credit in the real economy, favoring “The Infallible” and odiously discriminating against the risky. And to top it up, for no purpose, since never has a major bank crisis resulted from excessive exposures to what was perceived as “risky”, they have all originated in excessive exposures to what was perceived as absolutely safe.

And in this line I have proposed that if bank regulators must distort (to earn their keep or satisfy their egos) they should at least try to do so in favor of what society needs, like safeguarding our planet earth (and creating jobs).

And that the regulators could to that by allowing banks to have less capital when financing based on an assets project’s sustainability (or potential-of–job-creation) ratings.

Because that, would allow the banks to earn their highest-risk adjusted returns on equity, where they can be the most helpful to the society.

I have sent out my proposal to the UN’s Sustainable Development Solutions Network, and I hope it gets there… and is understood there

http://ourpiedaterre.blogspot.com/2013/10/if-regulators-absolutely-must-distort.html

FT Sustainable Banking Awards

The Financial Times and IFC have teamed up to create the following competition.

"The Emerging Markets Sustainable Bank of the Year Award recognizes the emerging markets bank that has shown excellence in creating environmental, social and financial value across its operations."

Sounds great but, if creating environmental, social and financial value across its operation is as I gather the promoters believe a worthwhile goal, then why do they not ask the regulators to send clearer signals about it to the banks in the emerging nations.

From what we can observe the regulators are currently signalling minimum capital requirements based exclusively on the reduction of risks as perceived by those outsourced risk surveyors we know as the credit rating agencies.

But if you want to give incentives so as to obtain the results the promoters seem to wish, then you might be better of sending clearer signals than those of a competition. For instance why do you not set up minimum capital requirements based on the rating of environmental, social and financial value creation? And, if you do, why not throw in something about job creation too, which also seems something quite worthwhile for the banks to do.

That is if course unless all what is meant when referring to sustainable is solely the sustainability of the banks themselves.