Regulators, stop the credit rating agencies from telling banks where it is safe to go. They haven’t a clue, as neither have you

Sir, Christopher Thompson quotes Bridget Gandy, managing director of Fitch “If you compel banks only to use a leverage ratio, the only way to be more profitable is to take more risks on the assets you have. You need to have balance between capital coverage of risk-weighted assets and leverage, risk is not just about size”, “Banks ‘need’ to cut €3.2tn of assets” August 12.

And that is precisely the type of mentality, which completely aligned with the mentality of the bank regulators in the Basel Committee, and which if allowed to prevail would guarantee that the €3.2tn of assets expected to be cut in Europe, would not be cut in the most economic efficient way, but only in accordance to its perceived riskiness.

And, as a direct consequence, Europe would end up with its banks stuffed with “absolutely safe” assets, which could be financed by other means, while it’s medium and small businesses, entrepreneurs and start-ups, those “risky” borrowers which might hold the best chances for Europe to return to sturdy economic growth, will be completely starved for access to bank credit.

A credit rating agency, incapable of looking around the corner to what might happen down the line, might be an extremely good agency for rating the creditworthiness of banks and borrowers this and the next quarter, but is extremely useless for rating the credit worthiness of anything some years ahead.

“The only way [for banks] to be more profitable is to take more risks on the assets you have” Yes Fitch, indeed… and what is wrong with that? The latest decades the way banks have become more profitable has only been by convincing the regulators they need to hold less and less capital on assets perceived as absolutely safe. And look what damages that has caused us.

No Fitch! I appreciate very much your credit ratings, and these will be used, but it is high time for regulators to stop you from telling the banks where it is safe to go, because, sincerely, you have not the faintest idea about it... as of course, neither have they.