December 12, 2018

The risk weighted capital requirements for banks have helped cause an utterly dysfunctional capitalism.

Sir, Martin Wolf, after reviewing Colin Mayer’s “Prosperity”,Jonathan Tepper’s and Denise Hearn’s The Myth of Capitalismand Deborah Hargreaves “Are Chief Executives Overpaid?” writes, “These books suggest that capitalism is substantially broken. Reluctantly, I have come to a similar conclusion. This is not to argue for the abandonment of the market economy, but for better companies and more competition” “Rethink the purpose of the corporation” December 13.

Sir, one of the most important tools of a functional capitalism, is the ability to channel efficiently the savings into investments. The most important artery for that have, for a couple of hundred years, been our banks. But our bank regulators, with their risk weighted capital requirements, that which allow a higher leverage with what is decreed or perceived as safe than with what is perceived as risky, have sadly clogged up those arteries.

To “Rethink the purpose of the corporation”? Much more important is for the regulators to define the purpose of the banks, beyond that of being a safe mattress into which stash away cash.

I challenge Mr Wolf to find, in all current Basel Committee bank regulations, a word about the purpose of banks being intermediating credits efficiently. 

Wolf also writes: “We should be explicitly encouraging a thousand different flowers of governance and control to bloom. Let us see what works.”

Absolutely… and that’s why, as an Executive Director of the World Bank, in an official statement I held that "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.”

Sir, and what when a globalized best practice is based on such a loony theorem that what bankers perceive as risky is more dangerous to our bank systems than what bankers perceive as safe? Are we not then globalizing stupidity?