October 26, 2012

It is the Old bank regulator we need to come back, he who does not distort.

Suppose a banker had to make a choice of whether to give a big loan to a very safe client, one of “The Infallible”, at a margin of Libor plus one half percent, or several smaller loans to small business, members of “The Risky”, at Libor plus four percent. An "Old" banker might have decided to lend to “The Risky” if, in his opinion, the difference in margins compensated for the difference in risk. The amount at exposure to each one of “The Risky” would also be much lower than the exposure to "The Infallible".

But then came a New regulator and told the banker, “If you lend to ‘The Infallible’ you only need 1.6 percent in capital while, if you lend to ‘The Risky’ you must hold 8 percent. And, of course, the New banker had then to decide for “The Infallible, because there was no chance on earth that the members of “The Risky”, could provide the bank with the same return on equity, when, in their case, the bank needed to hold FIVE times more equity.

And anyone who looks at and understands the implications of this absurd reality must come to the conclusion that in banking, whether our banks are to be Old or New, what we most need is an Old regulator, one who does not distort… one who does not believe himself to be the risk manager of the world. 

And, Sir, that is why David Lascelles’ “Banking’s ‘golden age’ is a myth that should be forgotten”, October 26, though an interesting article, is quite irrelevant to our most urgent needs. 

PS. FT I have tried to explain it to you in the simplest terms possible. As you can see I have not given up on that one day you will be able to understand what happened.