September 02, 2015
Sir, John Kay writes: “Efficient capital allocation requires above all the knowledge and experience to asses the quality of underlying assets, and the capabilities of those who manage them. Yet the ability most valued in the finance sector in the first decade of the 21st century was a keen appreciation of asset markets themselves. The deployment of such abilities by people with an exaggerated idea of the relevance of these skills, and an overblown sense of their own competence, plunged the global economy into the worst financial crisis since the Great Depression.” “The clever marketeers who crashed the economy”, September 2.
That is true but it is absolutely not the whole truth. Those clever markeeters would not have been able to get as far as they got, meaning to leverage the banks as much as they did, without the intimate cooperation provided by regulators. And these have even just as much, or perhaps even more overblown sense of their competence.
The bank manager John Kay remember from his schoolboy days in the 60s, and “who would base his lending decision as much on his local knowledge and the character of the borrower as on figures”, did not have to deal with credit-risk weighted bank capital requirements.
Sir, no matter how much “knowledge and experience to asses the quality of underlying assets” bankers could have, those capital regulations make any “efficient capital allocation” a mission really impossible.
Sir, dare an answer: Where would we be if our forefathers’ banks had been subject to credit-risk weighted capital requirements?
PS. Behind too many overblown senses of competence, hide too many uncritical journalists in awe.