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In 2003 and 2004 while an ED (same time as Otaviano Canuto), and while Basel II was being discussed, and as recollected in my book Voice and Noise of 2006, I suggested “flexible capital requirements, like moving up to 8.2 % or down to 7.8% by region, in response to countercyclical needs.”, which makes me one early proponent of macro-prudential regulations. But, of course, my proposal was strictly related to the basic capital requirement, because, when it comes to the setting of the risk-weights that translates the basic capital requirement into the effective ones, I have always opposed them wholeheartedly, now more than never. It is not prudent to interfere when there is no reason whatsoever to believe that you are in possession of superior knowledge. The role of regulators is not to concern themselves with the risk that the market already sees but with the risk the market might not be seeing. I ask, why should they regulate, as they do, basing it on the credit ratings being right, when what they really should be concerned with is when the credit rating are wrong? But since avoiding excessive risk taking can so easily tilt over into creating a dangerous excessive risk-adverseness, I also loudly voiced that “An excess of Basel’s banking regulations could be very harmful to your country’s development.” But you do not have to take my word for it. If anyone wants to understand the real implications of the dangerously prudish Basel regulations, I suggest reading the few pages on “Coping with Weak Private Debt Flows—Basel II” which appeared in the World Bank report “Global Development Finance 2003.” Just as an example it states “The regulatory capital requirements would be significantly higher in the case of non-investment-grades…borrowers borrowers with a higher credit rating would benefit from a lower cost of capital… A quantitative assessment of such effects is not straightforward, as the results are sensitive to a number of factors, including banks’ loan pricing policies and, in particular, the extent to which banks’ economic capital, which derives loan pricing, may exceed the minimum capital charges under the IRB approach. A recent study by the OECD (Weder and Wedow 2002) estimates the cost in spreads for lower-rated emerging borrowers to be possibly 200 basis points.” That chapter refers of course primarily to the problems of emerging nations… but it serves equally well to understand why there are now so many submerging nations… as small businesses and entrepreneurs have to pay according to my estimates 270 basis point more than a AAA rated client, just in order to compensate the banks for the regulatory discrimination based on perceived risk, the perception for which the banks have already naturally discriminated for by means of higher interest rates. What a shame that chapter got to be so ignored! I totally agree with Otaviano’s recommendations of “Monitor”, “Identify”, “Look for” and “Assess”, and the more of that the regulator will make available of that to the public the better, but also, the less of that the regulator will act on the better… because the regulators are quite often themselves the greatest source of systemic risk… as the current crisis has conclusively proved.