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.
Per Kurowski
A former Executive of the World Bank (2002-2004)
