Thursday, April 18, 2013

IMF’s “Rethinking Macro Policy II was a great conference, though My Question, again, went unanswered.

Very thankful for the invitation I attended IMF’s “Rethinking Macro Policy II” conference, April 16 and 17, and in which there was a special session on financial regulations. 

There were many good presentations and discussions and if I absolutely must pick one as the best that must be the one on financial cycles presented by Claudio Borio who currently is the Research Director and Deputy Head of the Monetary and Economic Department at the Bank for International Settlements (BIS). 

And as I usually have done over the last six years when attending conferences like these, I asked as many experts as possible:

My Question: 

If all bank crisis in history have resulted from excessive exposures to what was perceived as “absolutely safe”, or at least very safe, and none ever from excessive exposures to what was perceived as "risky"… what is the rationale behind the pillar of current Basel regulations, namely capital requirements for banks which are much lower for what is perceived as "absolutely safe", or at least very safe, than those for what is perceived as “risky”? Does not all empirical evidence suggest instead that the capital requirements should be slightly higher for what is perceived as "absolutely safe" than for what is perceived as "risky"?

As to the answers, as usual, some were intrigued, others stuttered, and many replied “Oh I know there is a clear explanation for the current capital requirements, I just can't remember right now what it was”.

And though I try to avoid asking those I know I have asked before, like Martin Wolf and Lord Turner, I found one participant who answered: “Yes, you asked me that 3 years ago and I have not been able to figure it out yet either”. 

By the way, have a look at a letter which asks a related question, and that I am trying to deliver to as many Ministers as possible during these World Bank and IMF Spring Meetings in Washington, April 19-20 

Please, anyone reading this post and possessing an answer to my Question, I would much appreciate sending it to me at

PS. In the conference I met someone who like me knows there is no rational answer.

PS. Here is a more extensive list of the horrendous mistakes of the risk weighted capital requirements