March 04, 2013
Sir, John Authers titles absolutely correctly “Bonuses are only a symptom of banking’s true problem” March 4. But when he then writes, “in the short term, all you need to do to make more money for a bank is take more risk”, I am not really sure he´s got it.
First it used to suffice to talk “about making more money for a bank”, because all risk were evaluated using the same standard, meaning the same capital base, but, ever since different risks require holding different levels of capital, it is much more accurate to talk about the real end results, meaning that of producing higher returns on equity.
And also it is absolutely not true, even in the short term, that for a bank to make more money, it is enough to take more risks, as long as risk premiums are priced correctly and there are no distortions. What happened now was not really about banks taking more risks, but that the risk-premiums of what is perceived as absolutely safe, were by the regulators allowed to be leveraged many times more than the risk-premiums of what is perceived as risky.
In other words what applies in these Basel II days, and seems to be continued in Basel III is: In the short term, all you need to make more money to the banks, is to leverage more what is perceived as less risky.
John Authers is very correct though when he points out “Limit the leverage that banks can use, and require them to hold more capital, and … These measures [and other] might help create a banking system that can sensibly allocate savers’ capital to productive investment opportunities. The pay issue, to the extent there is one, is dealt with in the process”.
But, Mr. Authers, why did it take until March 2013 for you to ask for “a banking system that can sensibly allocate savers’ capital to productive investment opportunities”? Is that not a hundred times more important than what excessive banker bonuses might be?