I hope David Malpass, nominated by USA, if confirmed as president of the world’s premier development bank, understands that risk-taking is the oxygen of all development.

Sir, Robert Zoellick writes: “If policymakers overlook the experience of developing countries during the crisis, they are less likely to consider emerging market dynamics, understand developing economies’ sources of resilience and appreciate vulnerabilities” “Who ever runs the World Bank needs a plan for emerging markets” February 6.

Of course no one should overlook experiences obtained during crises but, focusing excessively on these, puts a damper on the potential growth between the crises.

In his book “Money: Whence it came, where it went” (1975), John Kenneth Galbraith, referring to the accelerated growth experienced in the western and south-western parts of the United States during the 19thcentury, argued that it was the result of an aggressive banking sector working in a relatively unregulated environment. “Banks opened and closed doors and bankruptcies were frequent, but as a consequence of agile and flexible credit policies, even the banks that failed left a wake of development in their passing.”

For instance when banks are required to hold more capital when lending to their “risky” entrepreneurs, than when lending to their “safe” sovereign, as current Basel regulations mandate, that is bad enough in developed countries, but, in developing/emerging countries, it is absolute lunacy.

While an Executive Director in the World Bank 2002-2004, a time during which Basel I was discussed I did what I could to alert to the huge mistakes of its pillar, the risk weighted capital requirements for banks. Unfortunately I was not able to convey my warnings, and these were approved in June 2004.

I hope that David Malpass, now nominated by USA, if confirmed as the next president of the World Bank, fully understands the following:

First, that risk-taking is the oxygen of any development, and therefore the regulators’ risk adverse risk weighted capital requirements impede banks from taking efficiently the risks that are needed to push our economies forward. “A ship in harbor is safe, but that is not what ships are for.” John A Shedd.

Second, that what’s perceived ex ante as risky is much less dangerous to our bank systems than what’s perceived as safe, and so that these regulations doom us to especially large bank crises, because of especially large bank exposures to what is especially perceived (or decreed) as safe, against especially little bank capital.

God make us daring!

PS. Here is a brief summary of what I had to say on this issue before and during my term as an ED. It includes two letters published by FT

@PerKurowski

Some comments that I would like to be voiced during the upcoming IMF and World Bank annual meetings 2015 in Peru

Sir, Gillian Tett writes that one of the most important questions the IMF and the World Bank need to tackle during the upcoming meetings in Peru is: “What happens when the emerging market private money goes into reverse” “The credit bubble, the bears and central bankers” October 2.

If I had a voice in that debate I would repeat three comments that I’ve made over and over again for more than a decade, and that until now have been ignored (by FT too).

The first: Any forced deleveraging that might result will unfairly hit the most those who because they are perceived as risky, cause the highest capital requirements for capital scarce banks. And since emerging markets need those “risky” but tough SMEs and entrepreneurs to keep going when the going gets tough, as an emergency measure, they should lower substantially the capital requirements for banks for that type of lending. This by the way is far from being as risky as some could believe. (And this also applies to developed economies).

The second: In a letter published by FT in October 2004 I wrote: “We wonder in how many Basel [bank regulation] propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector. In some developing countries, access to credit for the private sector is all but gone, and the banks are up to the hilt in public credits.” That comment remains just as valid 8 years later.

And so emerging markets must make absolutely sure that access to bank credit of the private sectors, is not jeopardized by giving preferential access to the governments. Anyone who believes government bureaucrats are more capable to use efficiently borrowed funds has plenty of examples to make him change his mind. Look at Greece, look at Venezuela… in fact look at most countries… (And so this also applies to developed economies).

The third: In October 2007 I presented a document at the High-level Dialogue on Financing for Developing at the United Nations titled: “Are bank regulations coming from Basel good for development?” My answer then (and now) was a clear and rotund “NO!” The silly and purposeless risk aversion contained in the pillar of said regulations, the credit-risk weighted capital requirements for banks, make no sense whatsoever for an emerging country, since risk-taking is the oxygen of any development. (And it also equally applies to developed countries that need fresh risk taking in order not to stall and fall).

@PerKurowski