November 12, 2015

John Reed, competing on equal terms with equal capital requirements, traditional and investment bankers can be friends

Sir, John Reed writes that combining traditional banking and investment banking into a universal banking is inherently unstable and an unworkable model “Our universal banking mistake”, November 12. 

Reed argues: “Mixing incompatible cultures… make the entire finance industry more fragile…Traditional bankers tend to be extroverts, sociable people who are focused on longer term relationships. They are, in many important respects, risk averse. Investment bankers and their traders are more short termist. They are comfortable with, and many even seek out, risk and are more focused on immediate reward. In addition, investment banking organisations tend to organise and focus on products rather than customers. This creates fundamental differences in values.”

Reed might have a point, but, in my opinion, the main reason for the system being fragile is because regulators treat the different activities differently. With the credit-risk weighted capital requirements for banks, some are allowed to leverage their activities much more on equity than others. That introduces distortions that are impossible to clear for.

Apply one single capital requirement for all assets, for instance 8 percent, and the leveling of the internal playing field would strengthen the system and help to drive out many of those cultural differences. 

PS. Could farmers and the cowboys be friends, if treated so differently?

@PerKurowski ©