January 02, 2018

When bank regulators allowed banks to earn higher returns on equity by avoiding the “risky”, they violated a fundamental social contract

Sir, you write “Unemployment rates are low in the UK and US, but many of the new jobs are more precarious than the old ones they replaced… [so] the US and EU need to do more to encourage investment, and to deter anti-competitive behaviour and, as important, encourage competitive pressure on complacent incumbents.” “A better deal between business and society” January 2.

If one allowed banks to leverage more, and thereby obtain higher risk adjusted returns on equity when lending to what is perceived safe, than when lending to what is perceived risky, it would require ignorance, or total lack of concern, to believe banks will finance as much as usual small unrated companies and new entreprenuers.

But that is what regulators with their risk weighted capital requirements did and so it should be no surprise that “Despite low financing costs, private investment — the vital seed for long-term growth — remains insipid.” I am not talking about an “out-of-date regulatory models” that could be reformed, but about a fundamentally mistaken regulatory model.

You want “A better social contract… built on the idea of a humane, mutually beneficial interdependence between” employers and employees. Sir, who could argue against that? There’s always room for that.

But, how many times have I begged you to put the weight of the Financial Times behind asking the regulators: “Why do you want banks to hold more capital against what has been made innocous by being perceived risky, than against what is dangerous because it is perceived safe?”

But for some internal reasons of your own, perhaps even a petty one, you have refused to do so. In my book, just like when regulators regulated banks without caring about the purpose of these violated a social contract, you also violate your social responsibility as journalists by not intermediating opinions between your readers and those officially responsible for the decisions being questioned.