Attend Spring Meetings on development topics from Apr 18-23. Comment and engage with experts. Calendar of Events

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We have bank regulations that establish that the higher the ex-ante risk of default of the borrower is, the higher the capital requirement for the bank and vice-versa. This is in itself dumb because the higher that perceived risk, is the less will the banks anyhow lend to those borrowers, and the higher will the risk-premiums banks charge and which go into capital be. But, and in reference to this very important post… what would have happened if the capital requirements of banks had instead been based on the purpose of the loans, like the creation of jobs, and like the reduction of environmental threats? Such a regulatory interference, much the same as like the current regulatory interference does, would certainly have created distortions that would have resulted in another type of bank and financial crisis… but yet, the following question lingers. Would we all not have been better off with a bank crisis that resulted from the banks trying to achieve some good purpose, than with the banks only trying to avert defaults and thereby drowning themselves, and us, in debt of overextended sovereigns and in debt of triple-A rated borrowers being downgraded? If there is one institution that should be searching for the answer of the previous question, that is the World Bank… unfortunately it has not yet been willing to do so.