Tuesday, November 30, 2004

Some of my early public opinions on the Basel bank regulations

June 1997, in an Op-Ed Venezuela “We have this bank crisis not only because of an unduly flexible regulatory framework, but also because those regulations were practically irrelevant, due to the absence of adequate supervision. But it is also now evident that the financial health of our banks requires an economic recovery and any bank regulator complying with his mission should actively help to pursue that, instead of, as sometimes seems evident, trying to receive distinctions for merit from the Basel Committee. If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, but presiding over the funeral of the economy. I would much prefer the regulators to put some blue jeans on and try to help to get the economy moving.”

October 1998, Op-Ed Venezuela: “In many cases even trying to regulate banks runs the risk of giving the impression that by means of strict regulations, the risks have disappeared. Sometimes it is good faith... sometimes it is only pure faith… Frequently, in matters of financial regulations, the most honest, logical and efficient is simply to alert about the risks and allow the market, by assigning prices for them, to develop its own paths. I do not propose, not for a moment, that the State abandons completely the regulatory functions, much the opposite, 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

November 1999, Op-Ed Venezuela: “The possible Big Bang that scares me the most, is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause its collapse

March 2001, Op-Ed Venezuela: “Beware of bank consolidation” (an early manifestation against too big too fail and govern banks, and against too few bank regulation criteria) “Today, when the world seems to be asking much for bank mergers or consolidations, I wonder if we on the contrary should be imposing on banks special reserves depending on their size. The bigger the bank is, the worse the fall, and the greater our need to avoid being hurt

September 2002, Op-Ed Venezuela: “The riskiness of country risk: What a nightmare it must be to be a sovereign risk evaluator! If they underestimate the risk of a given country, it will most assuredly be inundated with fresh loans and leveraged to the hilt. If on the contrary, they exaggerate the country’s risk level, it can only result in making access to international financial markets more difficult and expensive. Any mistake will turn out to a self-fulfilling prophecy. Any which way, either extreme will cause hunger and human misery.”

January 2003, while an ED of the World Bank, in a letter published by the Financial Times: “Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds

March 2003, in a formal discussion at the Executive Board of the World Bank: “The sole chance the world has of avoiding the risk that entities such as the Basel Committee, accounting standard boards and credit rating agencies introduce serious and fatal systemic risks, is by having an entity like the World Bank stand up to them, instead of sort of fatalistically accepting their dictates."

April 2003, in a formal written statement delivered as an ED of the World Bank: “The Basel Committee dictate norms for the banking industry… 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.

May 2003, in comments made at a workshop for regulators at the World Bank: “A regulation that regulates less, but is more active and trigger-happy, and treats a bank failure as something normal, as it should be, could be a much more effective regulation. The avoidance of a crisis, by any means, might strangely lead us to the one and only bank, therefore setting us up for the mother of all moral hazards—just to proceed later to the mother of all bank crises. Knowing that “the larger they are, the harder they fall,” if I were regulator, I would be thinking about a progressive tax on size

May 2003, in the same workshop above: “Be careful, when looking for ways of avoiding a bank crisis, you could be inadvertently slowing development. I have been sitting here for most of these five days without being able to detect a single formula or word indicating that growth and credits are also a function of bank regulations.” 

May 2003, Op-Ed Venezuela: “In a world that preaches the worth of the invisible hands of the market, with its millions of mini-regulators, we find it so strange that the Basel Committee delegates, without protest heard, so much responsibility in the hand of so very few and human-fallible credit rating agencies… Perhaps we need to include a label that states: Warning excessive banking regulations from the Basel Committee can be very dangerous for the development of your country

October 2004, in a written statement delivered as an ED at the Board of the World Bank: “We believe that much of the world’s financial markets are currently being dangerously overstretched, through an exaggerated reliance on intrinsically weak financial models, based on very short series of statistical evidence and very doubtful volatility assumptions

November 2004, in a letter published by the Financial Times: “Our bank supervisors in Basel are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector (sovereigns)? 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. Please, help us get some diversity of thinking to Basel urgently; at the moment it is just a mutual admiration club of firefighters”