The “Stockholm Statement” by thirteen economists, including four former Chief Economists of the World Bank, is shamefully lacking.

The Stockholm Statement is shamefully lacking.

That is foremost so because chief economists of the World Bank, the world’s premier development bank, should know that risk-taking is the oxygen of any development; and should know that when banks were subjected to Basel Committee’s regulations, a distorting risk aversion was introduced.

To allow banks to hold less capital and therefore to leverage more their equity with what is ex-ante perceived, decreed or concocted as safe, than with what ex ante is perceived as risky; which allows banks to earn higher risk adjusted returns on equity on what’s “safe” than on what’s “risky” stops banks from financing the riskier future and cause these to settle on refinancing the “safer” past and present.

To force banks to hold more capital when lending to those perceived as risky, is a sure way to deny the weaker the opportunities of accessing bank credit and is therefore a decree to increase inequality.

To even suggest that the risk weighted capital requirements for banks is compatible with “leaving it to the market to do the rest” is as senseless as it gets. To argue: “The trend towards unfettered markets of the last quarter century explains a range of outcomes the world is now living with, including financial crises”, is not wanting to see what happened. Financial crisis are never caused by excessive exposures to what is ex ante perceived as risky; these are always the cause of unexpected events, criminal behavior or excessive exposures to what was ex ante perceived, decreed or concocted as safe… like AAA rated securities… like sovereigns like Greece.

Had this regulation introduced with the Basel Accord in 1988 been in place earlier, the world would have developed much less. Now perhaps these thirteen economists think that would have been better.

1997 in an Op-Ed I wrote: “If we insist in maintaining a defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, but presiding over the funeral of the economy. I would much prefer the regulators to put some blue jeans on and try to help to get the economy moving.” 

In April 2003, as an Executive Director of the World Bank I formally opined: "The Basel Committee dictates norms for the banking industry that might be of extreme importance for the world’s economic development. In its drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth” 

Unfortunately no such external observer was ever present…. Worse the distortions these regulations produce in the allocation of bank credit to the real economy are not even discussed.