Banks had and have little capital, not because of SMEs, but because of what perceived, decreed or concocted as safe.

Attracta Mooney writes “Rules introduced to shore up bank balance sheets left lenders reluctant to lend large sums to SMEs” “Fund houses take on banks over lending” September 8.

That is so wrong but, knowing you FT, you will do nothing to correct that impression.

Banks need to shore up their balance sheets, not because of SMEs, but because of too much lending against too little capital requirements, to what was perceived, decreed or concocted as safe.

Since the introduction of risk weighted capital requirements for banks with Basel I in 1988, and especially since Basel II of 2004 assigned different risk weights within the private sector, for instance 20% for what has an AAA to AA rated and 100% to what has no credit rating, banks were given huge incentives to lend to The Safe and became thereby reluctant to lend to The Risky, like the SMEs.

I pray one day banks get back to their business of earning their returns on equity by lending with reasoned audacity, instead of by minimizing their equity

Meanwhile, clearly shadow banks will have their day!

@PerKurowski ©

PS. Oops… sorry Attracta Mooney: “Rules introduced to shore up bank balance sheets left lenders reluctant to lend large sums to SMEs”, is correct.

My mistake was that I read it as some “specific new discrimination” had been introduced against the “risky” SMEs, something which Basel III did not, but Basel III (especially the leverage ratio which raised the minimum floor) and the crisis, have indeed intensified the discrimination that came from before. And here was my take on that Drowning Pool problem.

PS. Oops… sorry again Attracta Mooney: Again I must accept I was wrong. When writing my first commentary I had completely forgotten the liquidity requirements for banks enacted by Basel III. Of course these also affected the SMEs' fair access to bank credit.