Friday, October 11, 2013

Are there intended “unintended consequences” of the Basel Committee’s bank regulations?

There I was as a civil society participant (don’t ask me what that means) during the World Bank and IMF meetings. Suddenly, on a screen, I saw announced a “Forum on the effects of Financial Regulatory Reforms on Emerging Markets and Developing Economies (EMDEs). 

Since development and bank regulations is perhaps what I have most dedicated myself to over the last decade, completely pro-bono, I immediately went there. 

I announced that I was not registered, but the person attending said that did not matter, that I should write my name on a list, and I was given a folder. One hour later, because I had another scheduled appointment, I left, utterly depressed. What I regard as a monstrous mistake of Basel bank regulations, both for developed and the developing countries, was still not even on their radar screen.

You see, I have no respect for those who, with capital requirements for banks based on perceived risks, keep banks from financing the future my constituency needs, only in order to refinance the past.

But later, to my surprise, in the folder, I found a list with the emails of all the participants. And below is what I immediately wrote to them. Pardon some of the language, but I was truly upset. And I do hold them much responsible for the current sufferings of, for instance, the unemployed youth.

Are there intended “unintended consequences” of the Basel Committee’s bank regulations?

If you piss against the wind, and get wet, you might, theoretically, call that an unintended consequence, but, a sailor, even a drunk one, would just call that a dumb consequence of doing something stupid.

And if you allow banks to hold much less capital against what is ex ante perceived as “absolutely safe”, than what they need to hold against what is perceived as “risky”; banks will therefore make much more risk adjusted returns on their equity lending to the former than when lending to the latter. And the result HAS TO BE that you will get too much bank lending to “The Infallible”, like to sovereigns, housing sector and the AAAristocracy, and too little to “The Risky”, like to medium and small businesses, entrepreneurs and start-ups.

And that, even though, theoretically, you might call it an unintended consequence, even a sailor, though perhaps not a very drunk one, would also call it a dumb consequence of doing something really stupid. 

Dumb, because major bank crises never result from too much lending to The Risky, these are always the consequence of too much lending to some of “The Infallible” which, ex post, turned out to be very risky.

Dumb, because it completely ignores the risk-taking the real economy needs, in order to grow and remain sturdy. The growth of an economy which is almost exclusively based on “safe assets” only leads to its obesity.

Dumb, because it increases the inequality gap between “The Infallible”, which usually includes more of the past, the old, the developed and the haves; and “The Risky”, mostly the future, the young, the not developed, the have-nots.

And so when the Basel Committee and the Financial Stability Board, more than five years after this crisis of “absolutely safes” blew up in its faces, do not even recognize that their regulations are dramatically distorting the allocation of bank credit in the real economy, you really must have to wonder whether some truly dark intended “unintended consequences” might lay behind all this.

PS. I am not a regulator but once, way back, I was a sailor… though not a drunk one… at least not too much… and so I do know something of what I am talking about.

Per Kurowski
A former Executive Director of the World Bank (2002-2004)
One who screamed and warned like no one about Basel II… to no avail

The two documents I saw referred to in the meeting are:

Ms Bolivia...where I learned not to piss against the wind... 1966... 16 years old.