June 29, 2016
Sir, Martin Arnold and Caroline Binham report on the invitation of Bank of England extended to “The heads of the five big UK banks — HSBC, Barclays, Lloyds Banking Group, Royal Bank of Scotland and Standard Chartered — along with a few others including Nationwide and TSB”, in order to have a “Fireside chat” May 29.
The real UK economy should also be invited, so that it is given a chance to ask: “Mark Carney, BoE, when compared to that of SMEs and entrepreneurs, when will bureaucrats stop having preferential access to bank credit?”
Let me explain: The current risk weight of the “safe” sovereign is zero percent, and that of “risky” not-rated citizens 100 percent.
That means banks need to hold much less or no capital at all, when lending to the sovereign, than when lending citizens; which means banks can leverage their equity and the support they receive from society (taxpayers) much more when lending to the sovereign than when lending to citizens; which means banks can earn higher risk adjusted returns on equity when lending to sovereigns than when lending to citizens; and which means banks favor more and more lending to the sovereign over lending to the citizen. And so the SMEs and the entrepreneurs who basically represent the “not-rated citizens” must face harsher relative conditions accessing bank credit, than those that would prevail in the case all bank assets faced the same capital requirements.
There could be some discussion on whether lending to sovereigns represent less risk than lending to SMEs and entrepreneurs. I do not believe so. Banks do not create dangerous not diversified excessive exposures to SMEs and entrepreneurs; and, at the end of the day, the sovereign derives all its strength from its citizens.
But I doubt the real economy will be invited to the fireside chat… the regulators do not want to hear: “Sir, especially after Basel II introduced risk-weights that also favor the safer of the private sector, the AAArisktocracy; do you know how many million of loans to SMEs and entrepreneurs around the world have not been awarded, only because of your risk weighted capital requirements for banks? Have you any idea of how many jobs for our young ones have not been created as a direct consequence of this?