Let the Bank Stand Up
Dear Friends and Colleagues,
After having identified in our Review of the Financial Sector Assessment Program the problems of: “(i) weak credit culture with the prevalence of non-payments mechanism that undermine the development of the formal financial sector; (ii) limited access to formal, affordable financing by small and medium enterprises, a typical development trap in transition economies; and (iii) the slow pace of banking sector consolidation,” it is shameful to observe that the only recommendations we put forward are “(i) enhancement of the central bank’s ability to deal with insolvent banks, (ii) strengthening of penalty provisions, and (iii) increasing minimum capital requirements.” Come on!
We all know that risk aversion comes at a cost, a cost that might be acceptable for developed and industrialized countries, but that might be too high for poor and developing ones and, in this respect the Bank has the responsibility of helping developing countries to strike a right balance between risks and growth possibilities. Please, let us never forget that the other side of the Basel coin might be many unique developing opportunities (credits) forgone.
Why do I make these comments with such candor? Besides having been alerted during many years about the consequences of a Financial Puritanism that seems to be invading the world—and that does not get the real culprits either—in the specific case of my country, the combined portfolio of credits in commercial banks fell in real terms from about US$ 16,000 million in 1982, to only about US$ 4,000 by 1997. In such scenario, to then hear about Basel and its prudence regulations reminds me of the makeup of a corpse already in rigor mortis although I should perhaps note that in the case of this particular corpse, even almost six feet under, it has anyhow been able to generate surprisingly large profits, for itself.
In the area of risk management in finance, it might be an appropriate time to remember what Franklin Delano Roosevelt said in his First Inaugural Address, March 4, 1933, namely that “the only thing we have to fear is fear itself” and so in this respect we very much need the Knowledge Bank to evolve more into a Wisdom Bank or at least a more humble Common Sense Bank.
In a seminar on housing finance we heard that “Basel is getting to be a big rule book,” and, to tell you the truth, the sole chance the world has of avoiding the risk that Bank Regulators in Basel, accounting standard boards, and credit-rating agencies will introduce serious and fatal systemic risks into the world is by having an entity like the World Bank stand up to them—instead of rather fatalistically accepting their dictates and duly harmonizing with the International Monetary Fund.
As a small example, let me remind you that the World Bank has for some time and to no avail argued with respect to its own accounting that were it to follow strictly the current accounting rules, its financial reports would not reflect reality. Well, if the Bank has difficulties, imagine the rest of the world.
Per
