With bank regulators like the Basel Committee the real economy needs non-banks.

Sir, I refer to Gillian Tett’s “Titans of finance have moved on from banks” February 14.

There she writes: “What is really striking is the volume of non-bank financing that is quietly being supplied with minimal regulatory scrutiny… Non-banks are swelling in size because they do not face the same regulatory burden as banks, allowing them to turn a profit on business that banks now find uneconomic.” 

That is one way of phrasing it which does not really convey the truth. Banks, allowed to leverage 40-60 times their equity when lending to infallible sovereigns, housing and the AAAristocracy, can hardly be said subjected to a lot of regulatory scrutiny. Quite the contrary, the real market anchored effective scrutiny of the non-banks, is surely larger than that of the regulators scrutiny of the banks.

And neither is it the regulatory burden that makes some bank lending un-economic. It is more the regulatory unburdening, low capital requirements, which has allowed banks to make extremely high risk-adjusted returns on equity when lending to previously mentioned “infallible”; and this has created the incentives for banks to completely abandon lending to the “risky”, like the medium and small businesses, the entrepreneurs and start-ups.

That the growing presence of non banks “worries regulators”, should come as no surprise, since they clearly do not give a iota about if banks allocate credit efficiently to the real economy. No, with bank regulators like the current ones, the real economy is doomed to depend much more on non-banks.