October 11, 2017

France, why are you willing to give other countries the advantage of having better-capitalized banks?

Sir, Caroline Binham and Jim Brunsden write: France’s finance minister, Bruno Le Maire, said yesterday that France would oppose any increase in capital requirements for banks” France digs in heels over bank capital increase. “France digs in heels over bank capital increase” October 11.

I don’t get it. If I were a finance minister the last thing I would want to see are the banks of my country being less capitalized than that of others. I wonder what stories French banks must have fed him.

I am not referring to excessively capitalized banks. I just know that banks that might be leveraged 10 to 1, a capital requirement of 10% against all assets, will be more stable and more functional than a bank leveraged 20 to 1, the result of some generous risk weighted capital requirements. And I am sure that the first banks will be able to attract better shareholders willing to obtain lower but safer returns on equity, than those speculators interested in the latter option.

And the better-capitalized banks are, the more capable they are to assume that necessary risk-taking that allocates credit more efficiently to the real economy.

A ship in harbor is safe, but that is not what ships are for”, John A Shedd.

Banks described as safe in terms of risk-weighted capital requirements compliance are basically cross-your-finger-those-risk-weights-are-right safe banks. And I swear 0% for sovereigns, and 20% for what is so dangerously AAA rated, are absolutely wrong risk weights.