Tuesday, October 20, 1998

Regulations as enemies of bank missions

Note: Now 25 years later, when hearing about efforts to regulate cryptocurrencies, something which will clearly dilute the “caveat emptor”, the “buyers beware” principle, again I find reasons to refer to this article.


In Venezuela, much has been discussed about the solvency of the financial intermediation entities, mainly banking. In virtue of the great attention paid to the subject of banking regulation throughout the world and our recent banking crisis being quite recent, this should not surprise us.

In the debate I think, it is important to remember, that the functions of the financial sector are not limited, simply, to return the money received from its depositors, since, if so, the traditional mattress could be sufficient to fulfill this mission.

Apart from providing other opportunities, which serve to stimulate national savings, as well as fulfilling the task of facilitating monetary flows, there are two other functions, of great social importance, that banks must comply with. The first is to be a very active agent in the process of generating wealth and the second, to collaborate in the function of democratizing capital, that is, allowing access to capital to those people who, lacking resources, have initiatives and will to work.

Supposedly, with the commitment and ability to fulfill these last two functions, the creation and distribution of wealth, both the application and the approval of a banking license were justified. How far is it from being true today! Next, I present some reflections on the subject.

In 1975 John Kenneth Galbraith, in his book titled "Money, whence it came, where it went", advanced the thesis that one of the fundamental reasons, for the past century was achieved, the economic development of the West and the Southwest of the States United, it was the existence of an aggressive and unregulated bank, which frequently broke down, causing great losses to individual depositors, but which, because of an agile and flexible credit policy, left a trail of development.

As for the democratization of capital, it is clear that the new banking regulation, now more than ever, obliges the bank to lend to the one who has and refuse as a credit client, the one who does not. The days when a banker, on the simple basis of a character trial, could approve a loan, without having to incur the cost of creating reserves, which presumes in advance the non-payment, went down in history.

Of course, with the foregoing, I do not refer to the immense amounts consumer loans. Today, we can question the wisdom of the regulator, noting the ease with which a consumer gets a loan and compare it with how difficult it can be to acquire a loan for productive purposes.

The saddest part of the regulatory chapter is that it never really immunizes us against risk. Even in portfolio based on probabilistic expectations and compensations by means of high interest rates we know that, one way or another, risk remain… and in many cases even trying to regulate, runs the risk of giving the impression that by means of strict regulations risks have disappeared. Sometimes it's in good faith... sometimes it's only faith. When for example the SEC (Venezuela) arrogantly presumes of performing a significant mission, we know it is pure baloney.

Frequently, in matters of financial regulations, the most honest, logical and efficient is simply alert to alert about the risks and allow the market, by assigning prices for these, to develop its own paths.

I do not propose, not for a moment, that the State abandons completely the regulatory functions, much the contrary, what I propose is that it assumes it correctly. History is full of examples of where the State, by meddling to avoid damages, caused infinite larger damages. In the case of banking regulations developed to be applied in developed countries, I am not sure we are doing our country a favor adopting them with so much fervor.

But what are we to do? Regulations are fashionable and there are many bureaucrats in the world trying to find their little golden niche. I just read an article about a county in Maryland, USA, where, in order to be able to work as an astrologer and provider of horoscopes, you need to be registered and obtain a license in order to “read the hand palms. The cost of such license is 150 dollars.”


PS. The page with the details of Maryland certified astrologers has disappeared, it might have been an early case of fake news :-( Now the certification is issued by AFA Certified Astrologers - American Federation of Astrologers