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Re-regulating the Risk Premium to Realize the Right to Development

Author

Listed:
  • Oliver Pahnecke

    (Middlesex University)

  • Juan Pablo Bohoslavsky

    (CONICET, National Scientific and Technical Research Council
    Universidad Nacional de Río Negro)

Abstract

As parties to international treaties, States assume legal duties to respect, to protect and to fulfil human rights, including the right to development. This position obliges States to act where flawed regulation leads to financial practices that are depleting public funds with no economic or legal justification. One example of flawed regulation is risk weighted pricing which has been introduced by the Basel Accords: due to risk premiums, some borrowers pay more than others for the same loans to protect lenders from the possible consequences of high-risk lending, even when all these borrowers end up fully repaying the loans. This approach ignores that paid instalments reduce the risk over time and that after full payment of the principal the default risk is reduced to zero. Moreover, the risk premium can be replaced by collateral which means that both are property pledged by the borrower to protect the lender in case of a default. Yet, interest rates and risk premiums of loans and bonds are not treated as prices and collateral, but as property of the lender. If the risk premium is not adjusted over time along with the real risk, regulation not only turns discriminatory but also permits lenders to keep this de-facto collateral, thus depriving State borrowers of their property and funds necessary for the realization of the right to development. Readjusting risk premiums as proposed in this article would, replace or complement the debt reliefs necessary to fulfil the States’ human rights obligations while preventing discrimination against sovereign debtors based on their property status.

Suggested Citation

  • Oliver Pahnecke & Juan Pablo Bohoslavsky, 2022. "Re-regulating the Risk Premium to Realize the Right to Development," Development, Palgrave Macmillan;Society for International Deveopment, vol. 65(2), pages 145-152, December.
    • Handle: RePEc:pal:develp:v:65:y:2022:i:2:d:10.1057_s41301-022-00341-4
    DOI: 10.1057/s41301-022-00341-4
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    References listed on IDEAS

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    1. Michael Joyce & David Miles & Andrew Scott & Dimitri Vayanos, 2012. "Quantitative Easing and Unconventional Monetary Policy – an Introduction," Economic Journal, Royal Economic Society, vol. 122(564), pages 271-288, November.
    2. Juan Pablo Bohoslavsky & Francisco Cantamutto & Laura Clérico, 2022. "IMF’s Surcharges as a Threat to the Right to Development," Development, Palgrave Macmillan;Society for International Deveopment, vol. 65(2), pages 194-202, December.
    3. Joyce, Michael, 2012. "Quantitative easing and other unconventional monetary policies: Bank of England conference summary," Bank of England Quarterly Bulletin, Bank of England, vol. 52(1), pages 48-56.
    Full references (including those not matched with items on IDEAS)

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