November 27, 2013

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.