January 18, 2017
Sir, Ferdinando Giuglano writes: “banks with more equity and fewer bad loans on their books are better-equipped to lend to dynamic start-ups, which will drive economic growth in the future” “Italy resists Brussels’ tough love on banks” January 18.
That sounds so right, but unfortunately it is not. “banks with more equity and fewer bad loans” will still prefer to go for what their equity could be leveraged more with because that is how they maximize their expected risk adjusted returns on equity. And that means lending to what is perceived, decreed or concocted as safe and not to usually risky dynamic start-ups.
Giuglano also writes: “Italy’s lenders are saddled with around €350bn in non-performing loans — the product of the economic crisis and a stream of poor lending decisions.”
How sad that there is no research on the origins of those performing loans. It would be extremely useful to see which problem loans result from which cause in order to understand what happened. Without having access to any data I would bet that the loans perceived as safe, and against which banks had to hold little capital, represent the largest percent of poor lending decisions, and the loans that might be consider risky are those suffering the most from the economic crisis… among other because banks, scarce of capital, are forced to get out of these.
There are things about bank regulations that regulators do not want us to learn. And as a consequence, we still suffer from the mistakes.
Sir, I see Giuglano is a commentator for La Repubblica. Would he help me ask his Italian bank regulators the following very simple and basic questions? Depending on their answers Italy might want to sue the Basel Committee for Banking Supervision on the grounds of very negligent regulatory behavior.