November 21, 2012

Ultra-loose monetary policy distorts but, in that category, the title goes to capital requirements based on perceived risks

Sir, John Plender is indeed bringing up an interesting point in that ultra-loose monetary policy carries with it the possibility of maintaining, alive and sort of kicking, zombie companies that should otherwise and best disappear; and this prevents an effective resource allocation “UK economic growth hobbled by overambitious banks” November 21, and “Japan counts ‘zombie’ cost of easy money” November 6.

That said, and in the category of financial distortions, the title clearly must go to the capital requirements for banks based on perceived risk.

Just as an appetizer consider that the better information banks have, such as those Plender mentions Andy Haldane points to, “a shared utility, storing client accounts details”, the more this information will be adequately cleared for by the banks, and so the lesser the need to have that risk information also reflected in the capital requirements.

By the way it was interesting reading about the way by which Handelsbanken was entering Britain, since a couple of months ago I described a bank that I would be interested investing in, in the following way:

“As an investor in a bank, the first thing I want from it is to dedicate itself exclusively to lending to what is officially considered as “risky”, like small business and entrepreneurs, and for which the bank is required to have capital... meaning that I, as a shareholder, count. 

And I abhor my bank to lend to anything that is officially considered as “absolutely safe” for the following reasons:

a.- It probably means the bank will be less careful.

b.-They can do so with much less bank capital and so therefore I, as a shareholder, become less important.

c.- It is only in what is considered as absolutely not-risky that the banks can build up exposures that can lead me to lose all my investment.

d.-If I want to invest in something perceived as “absolutely not risky”, I do not need a bank for that... anyone can read a credit rating (and save himself some banker’s bonuses)