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September 29, 2008


Per Kurowski

So do I and this is a message that I sent them…

What about the oxygen of risk that development needs?

The most important pillar in the current bank regulations that came out of the Basel shop is the minimum capital requirements for banks that, at least until now are mostly based on a quite vaguely defined risk of default, and as this risk is measured by the de-facto and in some cases even de-jure risk regulators, the credit rating agencies.

That system of capital requirements is making it more difficult to provide the oxygen of risk that development needs, not only because of the regulatory tax on risk that now has to be added to the normal spread the market charges for risks, but also by selling the illusion that there are so many investment opportunities without risk.

The backdrop for this development is that our banking regulations have been taken over by professionals that give too much importance to the mission of adverting a bank crisis, at least on their watch, and too little consideration to what should be the purpose for our banks. One of the consequences of the above is that everyone measures and focuses on the direct costs derived from a crisis, giving no thought on maximizing the developmental results over the boom-bust cycle.

One of the factors why the above is not discussed sufficiently in development circles is that the World Banks has been silent on it, in the name of the harmonization with the IMF. The difficulties of achieving a reasonable balance between the risk-taking that development needs and the costs of the instability and crisis this can produce, is part of a debate that we cannot afford or even have the right to silence.

If the regulators are allowed to create capital requirements for the banks based on risk, does that not give developers the right to at least discuss capital requirements based on other variables, such as decent job creation or even the assistance in averting climate change?

David K

Hi Dr. Rodrik,

First, thank you for blog. It is very informative and thought-provoking.
In regards to the question of the impact of the financial crisis on the developing world, you may be interested in this brief analysis: http://blogs.cgdev.org/globaldevelopment/2008/09/us_financial_crisis_will_mean.php

I hope you find it relevant (and it is not old news).

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