January 04, 2018

If you really want banks to make green investments, allow bank to hold less capital against these than for instance against residential mortgages.

Sir, Suleika Reiners, Senior Policy Officer for Financial Reform, Institute for Financial Services, Germany writes: “banks need more equity, not less, in order to fulfil their key responsibility — namely to cushion risk, including for green investment. Lending for long-term endeavours such as large-scale renewable energy projects particularly deserves high-risk weightings” “Banks need more equity to boost green investment”, January 4.

Boy, has she got it all upside down. I have nothing against higher capital requirements for banks, unless these are imposed so irresponsibly so that the while bank credit machinery freezes. But, in order for banks to really boost green investment, they should be allowed to hold less capital against these investments than against other assets, so that they can earn a higher risk adjusted return on it.

Just look at how much they are financing residential housing, only because that’s perceived safe by regulator safe, and who therefore allow banks to hold little capital against the mortgages.

Reitners refers to “a study by the University of Cambridge in association with the United Nations Environment Programme Finance Initiative [that] has proved that stricter equity requirements are an insignificant factor in influencing the bank’s pricing of the loan or its willingness to lend.”

I have not read that study but, if those are the results, I am sure it contains major design flaws.

Sir, you refusal to discuss the distortions produced by risk weighted capital requirements, perhaps so as not to disfavour your bank friends, is partly to blame for the continuation of misconceptions as those expressed here by Suleika Reiners.

I don’t like the idea of distorting the allocation of bank credit to the real economy but, if we have to do it, let that at least be in pursuit of higher objectives than a simple risk avoidance, which will anyhow not isolate us from bank crises.