Saturday, April 12, 2008

My questions to the World Bank/IMF - Spring Meetings 2008

Risk is the oxygen of development!

It is absurd to believe that the US and other countries would have reached development without bank failures. When the Basel Committee imposes on the banks minimum capital requirements based solely on default risks, this signifies putting a tax on risk-taking, something which in itself carries serious risks. The real risk is not banks defaulting; the real risk is banks not helping the society in its growth and development. Not having a hangover (bank-crisis) might just be the result of not going to the party!

We need to stop focusing solely on the hangovers and begin measuring the results of the whole cycle, party and hangover, boom and bust! The South Korean boom that went bust in 1997-1998 seems to have been much more productive for South Korea than what the current boom-bust cycle seems to have been for the United States.

All over the world there is more than sufficient evidence that taxing risks has only stimulated the financing of anything that can be construed as risk free, like public sector and securitized consumer financing; and penalized the finance of more risky ventures like decent job creation. Is it time for capital requirements based on units of default risk per decent job created?

When is the World Bank as a development bank to speak up on this issue on which they have been silent in the name of “harmonization” with the IMF?

When are we to stop digging in the hole we’re in?

The detonator of our current financial turmoil were the badly awarded mortgages to the subprime sector and that morphed into prime rated securities with the help of the credit rating agencies appointed as risk surveyors for the world by the bank regulators.

If we survive this one and since it is “human to err” we know that if we keep empowering the credit rating agencies to direct the financial flows in the world, it is certain that at some time in the future we will follow them over even more dangerous precipices.

Note: I have just read the Financial Stability Forum brotherhood’s report on Enhancing Market and Institutional Resilience and while including some very common sense recommendations with respect to better liquidity management and “reliable operational infrastructure”; and some spirited words about more supervision and oversight (the blind leading the blind); with respect to the concerns expressed above, bottom line is that they recommend we should deepen the taxes on risks and make certain that the credit rating agencies behave better and get to be more knowledgeable… so that we are more willing to follow them where we, sooner or later, do not and should not want to go.

Do micro-credit institutions make too much use of “predatory ratings”?

Any group of debtors that is charged a higher interest rate because it is considered a higher credit risk is composed by those spending their money servicing a debt that they will finally default on, and those who should have in fact deserved a lower interest rate. Are there any real winners among them?

Who is out there talking about that the extensive use of ratings signifies something like a regressive tax for the poor? Who is out there informing the poorly rated about how very dearly they are paying for their loans? Who is out there analyzing the murdering impact that credit ratings have in chipping away at the minimum levels of solidarity that any society needs to keeps itself a society?

If there is a minimum of things that needs to be done in the world of micro credits that is to focus more on transparent system of incentives that: 1. Stimulates and rewards good group behavior and returns to the compliant borrowers some of the “extraordinary” margins earned. 2. Spreads out the costs of those who cannot make it over a much wider group of debtors.

And, by the way, this applies just the same to the financing of mortgages to the subprime sector.

Thursday, April 10, 2008

Why we cannot leave bank regulators to regulate on their own!

Nout Wellink the Chairman of the Basel Committee on Banking Supervision declared in the Financial Time on April 10 2008 that “Basel II is sophisticated and sorely needed”; and it is a splendid confirmation of why we cannot leave the traditional bank regulators regulating banks on their own. The just are digging ourselves deeper in the hole we are in!

Of course there is nothing wrong with sophistication as long as it does not take away from our understanding of what is going on, which it will be the end result, which makes further mockery of market transparency; and as long as it does not create new artificial market advantages, which it will by favoring the big banks and the continuation of our craze of putting ever more eggs into fewer basket; and as long as it does not create new systemic risks, which it will as long as “to err is human” applies, just like it applied in the case of the credit rating agencies.

But, what I most object to is that “there will be greater differentiation in the capital requirements for high risk and low risk exposure”. Who on earth told the bank regulators that the only role of banks was to avoid failing and that for that purpose you had to create an additional regulatory bias against risks, more than the natural bias against risk that already exists in the market? No, we do not need the banks to increasingly finance only securitized consumers and public sectors around the world just because that could be construed as having a lower risk of default. To do so could lead the world to default. If we are going to use default risk as a basis, then we better design the minimum capital requirements in terms of units of risk per decent job created.