UN’s Sustainable Development Goals, SDGs, against the backdrop of the Credit Risk Weighted Capital Requirements for Banks

The fact is that current bank regulations, by allowing for lower capital requirements, allow banks to earn higher risk adjusted returns on equity when lending to what is perceived as safe than when lending to what is perceived as risky. 

That’s it! Just avoid taking credit risks and you earn more. Not a word about a purpose for banks; like helping to generate jobs for the young or making the planet more sustainable. So we have a banking system that no longer finances the future, it now only refinances the past.

And to top it up, the regulators assigned a risk weight of zero percent to the sovereigns (governments) and of 100 percent to the citizens and private sectors on which that sovereign depends. Which means they believe government bureaucrats can use bank credit more efficiently than SMEs and entrepreneurs.

And of course those regulations completely distort the allocation of bank credit to the real economy and, by diminishing the opportunities of the risky to gain access to bank credit, increases existing inequalities. 

And of course those purposeless bank regulations are also dangerously useless. We know that major bank crisis never occur because of excessive financing of what is perceived as risky; they always result from excessive financing of something erroneously believed to be very safe 

And not one iota about this is being discussed in the UN, IMF or elsewhere

Can you imagine if by allowing banks to hold less somewhat less equity when lending to what finances SDGs, we made banks earn higher returns on equity when financing SDGs?  

And so I am sorry, against this backdrop, the announcement of the Sustainable Development Goals, the SDGs, might suggest the term Pollyannaish should henceforth be spelled as PollyUNnaish.

PS. Volkswagen should have rudely reminded UN bureaucrats that there is a real world waiting out there to game their SDGs.

My proposal for this Earth Day 2015.

Stop using purposeless, dangerous and silly credit-risk weighted equity requirements for banks, those which allow banks to earn higher risk adjusted returns on equity when lending to those perceived as safe than when lending to "the risky".

Purposeless: because major bank crises never ever result from excessive exposures to what is perceived as “risky” but always from excessive exposures to what was erroneously perceived as “absolutely safe”. 

Dangerous: because that completely distorts the allocation of bank credit to the real economy.

Silly: because why on earth should we taxpayers lend our support to banks if their only goal is to act as safe mattresses to stash away money in. Better to build a super-safe storage facility then.

Begin using more purposeful potential of planet-earth sustainability, job generation and poverty reduction weighted equity requirements for banks.

That way our banks will earn their highest risk adjusted returns on their equity when financing what is deemed useful for the society.

That way it makes sense for us taxpayers to lend our banks the support they need, in order for these to take the astute risks we need for the world to move forward in a sustainable way generating jobs and poverty reduction.

Who shall you tell about this proposal? All bank regulators starting by the Basel Committee for Banking Supervision and the Financial Stability Board; and to multinational entities such as the UN, IMF, and World Bank.

If they do not listen to you, at least force them to try to justify why they are supporting current credit-risk weighted equity requirements. These only impede the access to bank credit of "the risky", thereby killing opportunities and increasing inequalities.

The Clause

“As of this date, the Bolivarian Republic of Venezuela agrees not increase its current level of public debt, nor to contract public debt with payment due in less than ten years. In the case of failure to comply with the above, all current public loans will be considered due and payable immediately. In order to guarantee that any future government does not employ subterfuge to evade the spirit of this Law, the Nation agrees to abide by international arbitrage.” …Just this simple clause, typical of the those applied in the private sector to control corporate debt levels, would enable, as if by magic:

An immediate and dramatic drop in the interest rates applied to the country, when international markets realize that the country, with its relatively modest debt, is determined to put an end to the distortion of short-term debt, the refinancing of which has been the eternal reason for charging high rates, while at the same time guaranteeing that the resulting relief in servicing the debt is not used as a pretext for increasing it. 

The end of the country risk financial rating, when after only a few days credit raters will have to classify Venezuelan public debt as worthy of investment.

Opening the economy to all kinds of private initiatives on the part of individuals, families, companies and cooperatives, since all would have access to new loans under reasonable conditions – something which to date has been blocked by our political leaders’ hunger for tax income and the consequent increase in debt.

Friends, I am sure the clause I propose would help put our country on the road to sustainable economic development but - I swear! - how difficult it is to convince our leaders of the past and present who blithely condemn old debt while at the same time extolling the virtues of new debt.

It sounds easy but... could it be done? Indeed it could! The hard part will be to free ourselves of loans traffickers and to ensure that our eternal paradigm changes actually change – even if only one little paradigm. 

Some may rightly say that the country would lose part of its independence. However, it would be well worth it if this would allow us to decree an abolition of public debt slavery, the same way we abolished slave labor long ago. 

Translated from El Universal, Caracas, July 3, 2003