October 15, 2015

The Basel Committee’s dangerous, risk adverse and failed bank regulations illuminates brightly a World Bank's mission.

Sir, Alan Beattie writes” The World Bank’s policy experience makes it a natural source of ideas for growth and development, but its expertise is being underused… Ramping up one more source of infrastructure finance for emerging markets is a lesser priority than solving the developing world’s longer-term problems. The bank needs more money less than it needs a new mission.” That is correct ,but then Beattie titles it:  “The World Bank lacks the tools to enrich humanity” October 15.

No! The World Bank, as the world’s premier development bank, has the tools to enrich humanity, but it must be willing to use these… and not be silenced by being required to harmonize with other institutions, like the IMF, and that have completely different missions. The Basel Committee’s dangerous, risk adverse and failed bank regulations illuminates brightly a World Bank mission. 

Allow me to shamelessly quote myself. The following is part of what, as an Executive Director of the World Bank, in 2003, I formally stated with respect to Basel II, those bank regulations which would later be approved in June 2004. 

“The whole regulatory framework coming out of the Basel Committee for Banking Supervision, might possibly put a lid on development finance, as a result of being more biased in favor of safety of deposits as compared to the need for growth.

The financial sector’s role, the reason why it is granted a license to operate, is to assist society in promoting economic growth by stimulating savings, efficiently allocating financial resources satisfying credit needs and creating opportunities for wealth distribution. Similarly, the role of the assessor –in this case, the Bank– is to fight poverty, and development is a task where risks need to be taken.

From this perspective we have the impression that the Financial Assessment Program Report might revolve too much around issues such as risk avoidance, vulnerabilities, stress tests and compliance with international regulations, without referring sufficiently to how the sector is performing its social commitments…. In this respect let us not forget that the other side of the Basel coin might be many, many developing opportunities in credit foregone.

We all know that risk aversion comes at a cost - a cost that might be acceptable for developed and industrialized countries but that might be too high for poor and developing ones… There is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth. The World Bank seems to be the only suitable existing organization to assume such a role.

Ages ago, when information was less available and moved at a slower pace, the market consisted of a myriad of individual agents acting on limited information basis. Nowadays, when information is just too voluminous and fast to handle, market or authorities have decided to delegate the evaluation of it into the hands of much fewer players such as the credit rating agencies. This will, almost by definition, introduce systemic risks in the market and we are already able to discern some of the victims, although they are just the tip of an iceberg. Perhaps only the World Bank has the sufficient world standing to act in this issue

Basel is getting to be a big rulebook”—this said by the World Bank. And, to tell you the truth, the sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies, introduce serious and fatal systemic risks into the world, is by having an entity like the World Bank stand up to them—instead of rather fatalistically accepting their dictates and duly harmonizing with the International Monetary Fund.

Basel is getting to be a big rulebook—this said by the World Bank…. As the financial sector grows ever more sophisticated, making it less and less transparent and more difficult to understand for ordinary human beings, like us EDs, it is of extreme importance that the World Bank remains prudently skeptical and vigilant, and not be carried away by the glamour of sophistication. In this particular sense, we truly believe that the World Bank has a role to play that is much more important than providing knowledge per-se and that is the role of looking on how to supply the wisdom-of-last-resort.

A mixture of thousand solutions, many of them inadequate, may lead to a flexible world that can bend with the storms. A world obsessed with Best Practices may calcify its structure and break with any small wind. Who could really defend the value of diversity, if not The World Bank?"

Sir, in light of the financial crisis that has now hit the developed world I ask, does not what I wrote in 2003 contain much of what, besides its ordinary lending business, should be the World Bank’s mission… and not only for the developing countries

Sir, development is a continuous process, if we stop we stall and fall. God make us daring!

@PerKurowski ©