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

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.