Mme Lagarde, IMF owes Greece and it’s creditors, to explain and correct what was done wrong with bank regulations

Sir, Shawn Donnan writes: “There is broad agreement that the fund and its European partners badly miscalculated the extent of the negative impact of the punishing reforms and severe austerity imposed on Greece”, FT Big Read IMF “Lagarde eyes new act in Greek drama” August 14.

In 2011 during a Civil Society Town Hall meeting at the IMF I asked Mme Lagarde: “If bank regulators had defined a purpose for banks before regulating, we might have had a very different bank crisis, but not as large, systemic, and dangerous as this one…when are you going to require the regulators in the Basel Committee to openly and explicitly define the purpose of our banks… to see if we all agree? 

And Mme Lagarde answered: “My sense is that the most critical mission for the banks--and that is what we are trying to say when say that banks have to rebuild their capital buffers--is to actually finance the economy, first and foremost, and that should be really the critical mission”.

As is, now, some years later, banks still have to operate under the influence of credit-risk-weighted capital requirements, something that of course has absolutely nothing to do with adequately “financing the economy”.

So how can IMF or its European partners get anything right about Greece, if it does not want to acknowledge, or even dare to understand, how current regulations distorts the allocation of bank credit?

Those distortions, by favoring so much public debt, caused the Greek tragedy and, by discriminating against the fair access to bank credit of the “risky”, like SMEs and entrepreneurs it, stops the Greek tragedy from ending.

Mme Lagarde: IMF owes the Greek, and Greece’s creditors, to explain and to correct what was done wrong when regulating banks. That must come before anything else.

What I would do? Make sure banks needed to hold slightly less capital when lending to the private sector than when lending to government bureaucrats.

@PerKurowski