Wednesday, November 17, 2010

Does the devil reside in Basel?

The following is a verse of a Swedish psalm (244).

“God, from your house, our refuge, you call us, out to a world where many risks await us.
As one with your world, you want us to live. God make us daring!

“God make us daring!” expresses extraordinarily well the need that society has of risk-taking, in order to move forward, so as not to start rotting.

Unfortunately that is a need that our current global bank regulators, the Basel Committee, has not the least understanding of. They give banks huge incentives to operate in areas where risks are perceived as low, as if bankers would not do enough of that of their own will, and punish banks when entering areas where risks are perceived as high, as if bankers would not, on their own will, mostly avoid those.

The regulatory risk-adverseness is clearly evidenced by that banks, when lending to a small business or an entrepreneur, are now required to hold FIVE TIMES as much capital than when lending to a triple-A rated entrepreneur. That signifies that although the banks already compensate for perceived risk of default by charging different risk premiums, they have now to discriminate twice on that perception having to charge different premiums with relation to capital requirements.

As a result small businesses or entrepreneurs have their access to bank credit curtailed and their borrowings made much more onerous than needed, while those perceived as less risky have more access and cheaper access to bank credit than what they would otherwise have.

As a result we are suffering a huge financial crisis that has precisely resulted from what is always the cause of bank crisis, excessive investments and lending to what ex-ante is perceived as having a low risk of default, because, of course, no financial nor bank crisis has ever resulted from excessive investments and lending to what ex-ante is perceived as having a high risk of default.

We need to stop this regulatory nonsense that is killing the vitality of our economies. There is nothing as so risky long term as turning into cowards unwilling to run risks… and the Basel Committee has no right or reason for tempting the world into believing that development and growth can take place in a park with only safe attractions, only because the regulators are so childishly frightened of their so innocent and even indispensable default monsters. Scary is a world without defaults!

What about the risk of billions of young people around the globe not finding jobs? That is a real risk to write home about!

Let us never forget that the door to enter into a better and more sustainable, and more job-rich future, might only be found by taking the craziest risks in the middle of the craziest boom… that’s life… that’s development.

Honestly, the current risk weighted capital requirements for banks, are an insolence to the memory our risk-taking forefathers.