January 19, 2016

How can we wean the world off horrendously mistaken bank regulations?

Sir, Robert Zoellick writes: “After seven years of extraordinary governmental stimulus, the world needs a shift from exceptional monetary policies to private sector-led growth… Three possible ways to generate growth stand out for 2016.” “How to wean the world off monetary stimulus” January 19.

Then Mr Zoellick lists: Lawrence Summers’ “big government spending, especially on infrastructure, financed by borrowing at extremely low interest rates”;

Kenneth Rogoff’s “ease debtors’ plights by keeping rates low or even negative, and by restructuring debt, while setting the stage for productive investment”;

Michael Spence’s, and Kevin Warsh’s “emphasise that the demand that will drive private capital investment, which should support higher wages and profits, is expected future demand [so] policies intended to boost demand in the near term can actually discourage business confidence in the future”

And finally “others call for tax and regulatory policies to encourage private sector investment and employment”

I find myself squarely among the latter. Getting rid of that nonsense of credit risk weighted capital requirements for banks would eliminate that distortion that impedes bank credit reaching where it could do the most good, namely to those SMEs and entrepreneurs who most depend on bank credit to lend them the opportunities for helping to move theirs and ours economies forward.

As a member of Civil Society, whatever that now means, at a Civil Society Town-hall Meeting during the 2010 Annual Meetings, I had the opportunity to pose the following question to Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund, and to Robert B. Zoellick, the President of the World Bank:

“Right now, when a bank lends money to a small business or an entrepreneur it needs to put up 5 TIMES more capital than when lending to a triple-A rated clients. When is the World Bank and the IMF speak out against such odious discrimination that affects development and job creation, for no good particular reason since bank and financial crisis have never occurred because of excessive investments or lending to clients perceived as risky?”

I got, not splendid but reasonably good answers from both. Unfortunately, 5 years later very little has been done about how to wean the world off some lousy bank regulations, probably because regulators are more concerned with covering up their mistakes.

@PerKurowski ©