Wednesday, January 16, 2013

My letter in May 2012 to Anders Borg, the Minister of Finance in Sweden

Anders,

I am the Venezuelan born Sweden educated former World Bank Executive Director you met for a brief moment during the recent World Bank meetings. Let me refresh your mind about what I told you.

The capital requirements for banks based on ex-ante perceived risks, more risk more capital and less risk less capital are senseless, for many reasons.

Not only has no major bank crisis ever occurred as a result of excessive bank lending to what is perceived as risky, they have always resulted from excessive bank lending to what was perceived as absolutely not risky and turn out to be risky… even the Dutch Tulips would have been AAA rated before their crash.

Also these capital requirements discriminate against the sparkplugs of any economic growth, namely the “risky” small businesses and entrepreneurs.

Risk is the oxygen of economic growth and also what provides our banks with the Lebensraum that allows them to grow sturdy… Build them up on excessive risk-avoidance and you are building yourself an AAA-bomb ready to explode.

I invite you to see a brief video where I explain part of my arguments and, on that same blog, you will find much more.


As a small reference as to why perhaps you should hear me out just the following examples:

In November 1999 in an Op-Ed in the Daily Journal of Caracas I wrote “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 the collapse, of the only remaining bank in the world”

In January 2003, in a letter published by the Financial Times I wrote: “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”

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

Regards

Per
PS. A couple of days later I was advised by the Ministry of Finance that my letter had been forwarded to the political advisor Hannah Schönning... and that was all folks!