All dollars (or Pounds, or Euros) should be equal!

The efficient market hypothesis, and the capacity of free markets to allocate efficiently financial resources have, as a consequence of the recent financial crisis, been seriously questioned. There is absolutely no cause for that.

In a free market all dollars pursuing assets are equal, and so the prices reflect the markets appreciations of returns, risks, and other factors… and so in essence, all assets will produce equivalent all included risk-adjusted returns. Like any bet on the roulette.

But then came bank regulators, with their risk-weighted capital requirements, more risk more capital, less risk less capital, and determined that some dollars, those being lent to what was perceived as “absolutely safe” were worth much more because these could be leveraged by banks much much more, than the dollars lent to what was perceived as “risky”. Like doubling the roulette payout when playing it safe, like betting on a color.

And of course that made it impossible for the markets to function. It would be like pricing assets in dollars Euros and Pounds, simultaneously without informing the markets of which currency was used. In fact, since bank capital when in “risk-free” land could sometimes be leveraged about 40 times more than when in “risky” land, the currencies used are perhaps more like dollars, pesos and yen. 

And so a dollar going to someone “risky” is for the banks worth de facto much much less than a dollar going to the AAAristocracy. Talk about financial exclusion! Talk about increasing inequality gaps!

Discriminating against risk-taking, in the "Home of the Brave"... you´ve got to be kidding!

Please regulators, allow a dollar to be a dollar for everyone! So that markets will work again!

PS. By the way who authorized all that?

Why is the President of the World Bank not informed about consequences of risk-weighted capital requirements for banks?

In Russia, September 6, 2013, Jim Yong Kim, the President of the World Bank Group, said the following in his statement issued at the end of the G20 summit.

“The G20 has pledged to achieve strong, sustainable, balanced and inclusive growth, and creating more and higher-quality jobs.”

Mr. Jim Yong Kim. As long as bank regulators allow banks to hold much much less capital when lending to "The Infallible", like some sovereigns, housing or the AAAristocracy; than what they are required to hold when lending to “The Risky”, like medium and small businesses, entrepreneurs and start-ups; and which means the banks will earn much much higher risk-adjusted returns on their equity when lending to the former than when lending to the latter... "strong, sustainable, balanced and inclusive growth" able to create more and higher-quality jobs” will just not happen. 

The odious and dangerous discrimination of "The Risky" does only increase, not reduce, the gap between those perceived as safe, the past, the developed, the haves, and those perceived as “risky”, the future, the developing, the have nots.

And the truly sad thing is that no one in the world’s premier development bank wants to inform its president about it.

Mr. Jim Yong Kim. I assure you, risk-taking is the oxygen of development. God make us daring!

Per Kurowski

A former Executive Director of the World Bank, 2002-2004

One gap that sure needs to be closed

The Spring Meetings of the World Bank and the International Monetary Fund of April 2012 are surrounded with various calls about “reducing gaps” 

Well one gap that surely needs to be closed, and where the World Bank and the IMF should be at the forefront, is the one odiously increased by senseless bank regulators, between those perceived ex-ante as “not-risky” the AAAristocracy, and those similarly perceived as “risky”... the new untouchables.