June 05, 2017

World Bank, once again, the Basel bank regulations’ implicit risk aversion, attempts against any development.

Sir, Shawn Donnan writes: “In an interview, Paul Romer, World Bank chief economist, said the long-term effect of weak investment on developing economies was one of the main long-term challenges facing the global economy.” “World Bank warns on weak investment” June 5.

In October 2007, at the High-level Dialogue on Financing for Developing at the United Nations, in New York, I presented a document titled “Are the Basel bank regulations good for development?” It contained among many other the following paragraphs:

“It is very sad when a developed nation decides making risk-adverseness the primary goal of their banking system and places itself voluntarily on a downward slope, since risk taking is an integral part of its economic vitality, but it is a real tragedy when developing countries copycats that and falls into the trap of calling it quits.”

“The World Bank, as a development institution, should have played a much more counterbalancing role in this debate, but unfortunately it has been often silenced in the name of the need to "harmonize" with the IMF. Likewise, the Financial Stability Forum is also, by its sheer composition and mission, too closely related to the Basel bank regulations to provide for an independent perspective, much less represent the special needs of developing countries.”

“For the record, let us state that although we have made the above comments from the perspective of ‘finance for development,’ most of the criticism put forward is just as applicable to developed countries.”

“To conclude, we wish to insist that no society can survive by simply maximizing risk avoidance; future generations will pay dearly for this current run to safety.”

Unfortunately my arguments have gone nowhere. As is, the wagons circled by bank regulators to fend off any criticism, has been impenetrable to truths such as those implied in John A Shedd’s “A ship in harbor is safe, but that is not what ships are for”.

PS. 2002-2004, as an Executive Director of the World Bank I did what I could to silence those sirens singing that the risk weighted capital requirements would make our banks, and our economies, safer. I stood no chance. Basel’s siren’s song sounded much sweeter.