August 16, 2016
Sir, Amar Bhidé writes: “Sweden’s Handelsbanken is an exemplar of prudence… The target loan loss ratio is zero; low loan losses, in turn, allow the bank to offer competitively priced loans and personalised service to creditworthy customers.” “Easy money is a dangerous cure for a debt hangover” August 17.
That is NOT exemplary prudence. “A target loan loss ratio of zero”… might allow “to offer competitively priced to creditworthy customers” but it will clearly not offer sufficient opportunities of credit to the not so creditworthy, which includes too many risky SMEs and entrepreneurs, those that could help provide the proteins the economy needs to move forward, in order not to stall and fall.
The truth is that in the medium and the long term, the creditworthy are more benefited by the banks taking more risks on the not creditworthy, than by just getting low priced loans.
However Bhidé also qualified it with: “prudent case-by-case lending also undermines the stimulative effect of the loose money unleashed by central bankers [because] Experienced financiers will not lend more to less worthy borrowers simply because of low or negative interest rate policies.”
Yes, indeed, but much more undermining of the stimulative effect of loose money is caused by the risk weighted capital requirements for banks… those which require Handelsbanken to hold more equity when lending to someone perceived risky, than when lending to someone perceived safe. Those that result in Handelsbanken earning higher expected risk adjusted returns on equity when lending to someone perceived, decreed or concocted as safe, than when lending to someone perceived as risky. Those that cause “small and medium-sized businesses have been left behind”.
Bhidé opines: “What the Fed and other central bankers can — and should — be held responsible for is prudent lending by banks”
Absolutely, I totally agree! But “prudent lending” means guaranteeing the economy sufficient risk taking by the banks; and knowing that, contrary to what current regulators believe, major bank crises are never caused by excessive exposures to something perceived risky, these are always caused by excessive exposures to something perceived as safe when placed on their balance sheets.
Sir, Handelsbanken is a Swedish bank, somehow it seems to have completely forgotten that in Swedish churches we all sang “God make us daring!”
PS. Bhidé writes that central bankers “base their assessment of risks, and of what would have happened without their intervention, on models whose mathematical sophistication hides a primitive representation of finance and the economy.”
That is correct. In October 2004, as an Executive Director of the World Bank, I formally warned: “We believe that much of the world’s financial markets are currently being dangerously overstretched through an exaggerated reliance on intrinsically weak financial models that are based on very short series of statistical evidence and very doubtful volatility assumptions.” Sir, how many spoke out that clear at that time?