Wednesday, October 18, 2017

Explaining to World Bank and IMF the horrific mistakes of Basel’s bank regulations, has not been an easy journey



28:30, I am Per Kurowski, of New Rules for Global Finance

This is a question for the umpteenth time to the World Bank:

As the world’s premier development bank the World Bank must know that risk-taking is the oxygen of any development. So why is it still not speaking out against the risk-weighted capital requirements for banks that put a brake on risk-taking, like on the lending to SMEs small and medium sized enterprises…even though never ever has a major bank crisis erupted because of excessive exposures to something ex ante perceived as risky.

 30:50, World Bank, Jim Yong Kim

On risk taking I am not sure I understood the question correctly, but there is, because of in many ways I think very much necessary prudential rules, the Basel process, one of the side effects of it is that it has been a systematic de-banking of many developing countries, especially in Africa. 

And so many banks Standard Chartered and others that had very strong presence in the developing world have for the most part left. And so we have a terrible time in terms of accessing capital markets in the way that they did before.

So it’s a huge concern for us, and we are continuing to engage with the Basel process and we are continuing to try to talk about some of the side effects. For example it is much more difficult and expensive to send remittances back now because these institutions don’t exist. 

And so the problem of insuring that the poorest countries have access to capital markets is very-very high on our agenda, and is really at the core of the major issue we talked about in spring meetings which is our cascade; and the cascade is essentially recognition that on the one hand it is very difficult for very good emerging markets infrastructure projects to get capital, and on the other hand there is more than 10 trillion dollars in negative interest bond, and 25 plus trillions in very low earning bonds and another 8 trillion in cash sitting in peoples safes, and they would like to get a higher return, but the perception of risk in the emerging market is so high, that the capital is just not moving.

So we are putting so much of our effort into mitigating this situation where you have great projects, great potential for building infrastructure that would lead to growth but that are not being financed; we are really focusing on filling that void on the problem I think you are pointing to.

My comment: It was not answering my real question but it was still a very valid answer. If given a chance my re-question would have been: Do you think Standard Chartered would have left those development markets had it had to hold the same capital against all its assets than what it is required to hold on loans to these markets? The answer to that is surely “No!”

 35:25, IMF, Mme Christine Lagarde.

I am actually tempted to address also this question, is that okay?

Because I think it is an important point and one that has very complex ramifications. It has complex ramifications in the banking regulations business, in the banking supervision business, and in the accounting business.

And then it is at the very junction of between sort of self-established model by the banks versus models established by the supervisors. 

I think we both would agree that methods that would actually encourage the lending by banks and by insurance companies and by pension fund to SMEs, you know with the risk associated with it, should actually be very much in order.

At the moment the risk weighing methods and the models that are being used are discouraging from actually investing and taking risk to benefit the small and medium sized enterprises 

And that’s not necessarily the best avenue to support the economy and to support entrepreneurs who want to have access to financing.

My comment: Many thanks, but Mme Lagarde, it really behooves the IMF, and the World Bank, to understand why it took them about 15 years, Basel II, to see this problem.

 30:50 World Bank, Jim Yong Kim

Just to add to that, we are now trying to come up with lots of different innovative approaches to de-risking those investments, taking first loss, using political risk insurance credit enhancements, lot of tools that we are using now to try to respond to the situation

 My comment: That is good to hear, but beware, de-risking credits, against distorted and inadequate bank regulations, could have very bad unexpected consequences.

PS. Very much inspired by John Kenneth Galbraith’s “Money: Whence it came, where it went” (1975), I started my fight against Basel Committee’s regulations in 1997, in my very first Op-Ed “Puritanism in Banking”.

And in 2003, as an Executive Director or the World Bank, in a workshop for bank regulators I warned: “The other side of the coin of a credit that was never granted, in order to reduce the vulnerability of the financial system, could very well be the loss of a unique opportunity for growth. In this sense, I put forward the possibility that the developed countries might not have developed as fast, or even at all, had they been regulated by a Basel.”

In 2007, ten years ago, at the High-level Dialogue on Financing for Developing at the United Nations, as civil society, I presented the document: “Are the Basel bank regulations good for development?”

And since then I do not know how many times, I have tried and failed to draw IMF’s and World Bank’s attention to the many very serious mistakes that are imbedded in Basel’s risk-weighted capital requirements for banks.

Have I arrived at the end of my journey? I am not 100% sure, but I do see some light J