October 17, 2012

“Rigorous capital allocation” currently means banks abandon those officially, ex-ante, perceived as “The Risky”

Sir, Tom Braithwaite and Shahien Nasiripour report “Pandit´s exit restores air of calamity at Citigroup”, October 17. 

In it, in reference to Mike O´Neill, its chairman, they write that people who have worked with him say “he is no nonsense and rigorous about capital allocation, willing to shut underperforming businesses without compunction”. 

I would hope they would try to set that description in the context of regulatory capital requirements for banks based on the ex-ante perceived risk. 

If so they will better understand that the banks, maximizing their returns on equity, will concentrate on those for which the regulators do not require a lot of equity, “The infallible” and, without compunction, ignore those which require holding more equity, “The Risky”, like the small businesses and entrepreneurs. 

And of course, those bankers who dare not to be that rigorous about capital allocation, might soon find themselves out of a job.