Thursday, June 19, 2014

The capital control the IMF supports

Overwhelmed by what is happening in my country Venezuela, I briefly pause to refer to the war that incompetent and pusillanimous regulators in the Basel Committee and the Financial Stability Board, have declared against what they consider is the risk of banks.

The pillar of their current banking regulations are shareholder capital requirements against the various bank assets, according to the perceived credit risk.

For example the Basel II rules allow banks to lend huge sums to "infallible" sovereign against zero capital; huge amounts to private borrowers rated AAA against only 1.6% equity; while, against small loans to businesses or entrepreneurs, they are required to hold 8% in capital.

Since the perceived credit risk is already considered by the banks in the interest rates they charge, the above translates into banks being able to earn much higher risk adjusted returns on equity when lending to the "safe" than when lending to the “risky".

And, as a result, the portfolio of banks each day focuses more on what is perceived as “safe”, while bank credit to “the risky”, the credit needed to finance our future, becomes more each day scarce.

If one insures against all risks, one runs the risk that after paying all insurance premiums, you do not have anything left to eat with. In that sense you must always before analyzing risks define what the most important objective, so as to better understand what risks you cannot help but to assume.

And the citizens have a vital interest in that bank credits are awarded to the real economy efficiently, because on that will depend their future jobs. And therefore, avoiding the risk of banks to fail, you should never include something that makes it difficult to properly allocate banking credits.

If bank capital requirements were somewhat lower for projects that had very good potential of generating new-and-different-jobs-ratings, then I might understand ... but only to avoid the risk of bankruptcy of some banks… never!

And even when those regulations function as de facto capital controls, channeling bank credit to the "safe" and away from "risky", the International Monetary Fund, who has so much history opposing capital controls, plays along as if it does not understand.

Of course the IMF, among its explicit responsibilities, has to seek to ensure financial stability, and so that there can be some confusion with respect of avoiding bankruptcy of some banks. But even if so, a simple empirical study on the causes of banking crises, would have indicated the IMF that these never ever result from excessive lending or investment to what is perceived risky, but exclusively because of excessive exposures to what is ex ante believed to be absolutely safe, but is not so, ex post.

And the World Bank is complicit in the silence. As the first development bank in the world it must know that without risking open doors behind which, hopefully, we can find what can help propel us forward, we will only be stuck in the past,

Also, today, when the issue of inequality has been made so fashionable by Piketty, do not ignore that discriminating against the weak, the “riskier”, can only increase inequality.