The World Bank should object IMF’s support of bank regulations that hinders development and promotes inequality
Sir, you opine that “Crisis lending should be the job of the International Monetary Fund” “Mission creep must stop at the World Bank”, April 20.
I am not familiar with the cases of Nigeria and Papua New Guinea, but the way you argue it, you most certainly seem to have a point. That said I am not sure that China’s bilateral lending and the new Asian Infrastructure Investment Bank should be taken as direct substitutes for the World Bank in providing development finance.
But we can also argue that IMF, by supporting the very bad bank regulations coming out of the Basel Committee, has also overstepped its boundary. Let me explain.
In order to make banks safer, regulators now require banks to hold more capital when lending to The Risky than when lending to The Safe.
That means that banks will be able to leverage more their equity when lending to The Risky than when lending to The Safe.
That means that banks will be able to earn higher expected risk adjusted returns on equity when lending to The Risky than when lending to The Safe.
That distorts the allocation of bank credit to the real economy, favoring with too much credit at too generous conditions The Safe, and causing The Risky to have too little and too expensive access to bank credit.
That perceived, decreed or concocted as “safe” is sovereigns, residential housing and the AAArisktocracy. That perceived as “risky” are unrated citizens, SMEs and entrepreneurs.
And since risk-taking and the efficient allocation of credit are essential elements for development, IMF is helping to make the World Bank’s mission of combating poverty, that much harder.
And one day the IMF will also discover those regulations are bad for its own mission of promoting financial stability. The 2007-08 crisis was entirely caused by The Safe.
And by denying “The Risky” a fair access to the opportunities that bank credit can provide, those regulations also promote inequality.
Sir you also write that the World Bank “should switch much more of its energy towards plugging the real holes in development, the provision of ‘global public goods’”.
Yes, and speaking out loudly against these truly lousy bank regulations is long overdue.
In March 2003, as an Executive Director of the World Bank I formally stated: “The sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies will 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.”
And in April 2003, also as an ED, I argued: “In the Basel Committee’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that 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."
I am still waiting!
“A ship in harbor is safe, but that is not what ships are for.” John A Shedd, 1850-1926.
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