July 26, 2016

If banks want to keep the society’s support, they must again become efficient allocators of credit to the real economy.

Sir, Simon Samuels, a banking consultant, writes that “the priority of regulators and policymakers in Europe…should be developing financing solutions other than banks from which customers can borrow” and one way he suggests is “to give borrowers an incentive to shun banks and so deepen Europe’s capital markets.” That sure does not sound like a consultant working for the long term interest of his clients. Does Samuels really believe banks will keep the huge taxpayer support they now have, if they abandon lending to all in the real economy? “Bank regulators, be careful what you wish for” July 25.

But then Samuels dutifully defends the profitability of banks by warning against increased capital requirements. He writes: “If the return on equity from mortgage lending or corporate lending falls by more than half — as has been widely estimated under the proposals as drafted — then banks will either ration lending in these areas or try to raise prices.”

But Samuels also keeps mum about the fact that, for the purpose of the capital requirements for banks, the risk-weight for mortgage lending is 35%, while the risk weight for any corporate rated BBB+ or below is 100% or more. Which means that banks already earn much higher risk-adjusted returns on equity when financing houses, or investing in other perceived, decreed or concocted safe assets, than when financing those “risky” SMEs and entrepreneurs, those that could create the jobs needed for house owners to service mortgages and pay the utilities.

Of course, as someone interested in the well-being of the real economy, I would also tell the regulators to go very easy on the increase in any capital requirements for banks. But, much more than that, as I have done for soon two decades, I would beg regulators to eliminate that regulatory risk-aversion that has stopped banks from financing the risky future and now have these only refinancing the safer past.

If the banks and bankers forget that their role is to allocate credit efficiently to the economy, and that that is the only reason why society supports them, they will very soon be out of business… and out of bonuses.

@PerKurowski ©