Tuesday, October 15, 2013
If regulators absolutely must distort the credit allocation of banks, let it at least be for a good purpose
The risk-weighted capital requirements, the pillar of bank current bank regulations, Basel II and Basel III, more-risk-more-capital and less-risk-less-capital, are incredibly stupid and serve absolutely no purpose.
Incredibly stupid since just some little empirical research would evidence that all major bank crises, no exceptions, have resulted from excessive exposures to what was ex-ante perceived as “absolutely safe”, but which ex post turned out to be risky; and none ever has resulted from excessive exposures to what ex ante was perceived as “risky”. In fact more-risk-less-capital and less-risk-more-capital, totally the opposite, would have been more correct.
And they serve absolutely no purpose because, allowing banks to earn much much higher risk adjusted returns on their equity when financing “The Infallible”, than when financing “The Risky”, causes banks not to finance the “risky” future, and mostly dedicate themselves to refinance the “safer” past.
In my opinion, nothing can help to enable so much the financing of our two most urgent needs, the creation of sturdy jobs for the young, and the investment needed for the sustainability of our planet than more correctly aligned capital requirements for banks. First these should be set equal for all bank assets, for instance 8 percent, but then allowed to be lowered, gradually, down to 4 percent, depending on the potential-of –job-creation-ratings and/or sustainability ratings, like the SRI or ESG ratings mentioned, whether of the project or of the issuer, and the length of the contract.
That, as you can all understand, would allow the banks to earn the highest-risk adjusted returns where they can be the most helpful to the society.
PS. I carefully reviewed the whole EUROWEEK issue on Sustainable and Responsible Capital Markets, September 2013, and, unfortunately, though it includes many good discussions, I did not found a single word about the perceived risk weighted capital requirements.
Tuesday, October 1, 2013
Jim Yong Kim, President of World Bank, and Christine Lagarde, Managing Director of IMF, here is a question on Climate Action:
On Tuesday, October 8, 2013 there will be an opening discussion by Jim Yong Kim, President, World Bank Group and Christine Lagarde, Managing Director, International Monetary Fund; on the the topic of “The economic case for Climate Action”; moderated by Zanny Minton Beddoes, Economics Editor, The Economist.
And below the question I would like to make to them all:
Current capital requirements for banks are weighted for the ex ante perceived risk of the asset; more-risk-more-capital, less-risk-less-capital.
That does not make any sense, since the ex ante perceived risks are already cleared for by banks and markets, by means of interest rates, size of exposures and other terms.
Besides, since all major bank crises have resulted from excessive exposures to what was perceived, ex ante, as “absolutely safe”, and none ever from excessive exposures to what was perceived, ex ante, as “risky” these capital requirements do not make sense in the quest of looking for the stability of the banks.
And so, if bank regulators cannot refrain from playing risk managers for the world, and interfering with the markets, why does not the World Bank and the IMF at least beg them to design capital requirements based on the potential for helping the sustainability of our planet ratings, (and also on the potential for creating jobs, especially for the young, ratings).
That way the distortions which different capital requirements for different bank assets cause, and which hinders the effective allocation of bank credit in the real economy, would at least serve a social purpose.
In concrete terms that would mean changing from allowing banks to obtain better risk-adjusted returns on their equity when lending to “The Infallible” than when lending to “The Risky”; to allowing the banks instead to earn those higher risk adjusted returns on their equity when helping the sustainability of our planet (and when creating jobs for our youth).
Besides, the World Bank, as the premier development bank of the world, should know that “risk-taking” is the oxygen of any development, and that there is nothing as risky for the economies and for the society as an excessive risk-aversion; which is why in our churches we at least used to pray “God make us daring!”
PS. World Bank, you who fight for reducing poverty, and the inequality gap, should also know that the current capital requirements based on perceived risk, functions as a wedge increasing the differences, between those already benefited by banks and markets, like solvent developed countries and AAAristocracy, and those already discriminated against by banks and markets, “The Risky”, like medium and small businesses, entrepreneurs and start-ups, and poor developing countries.
A former Executive of the World Bank (2002-2004)