July 13, 2018

The UK needs its banks to get rid of equity minimizing financial engineers and call back savvy loan officers (perhaps some like George Banks)

Sir, Martin Wolf writes he now “rather suspect”, that “the BoE’s views on risk weights might be leading to an economically unproductive focus on property lending”. “Labour’s productivity policy is a work in progress” July 13.

Banks are allowed to leverage more with what’s perceived, decreed or concocted as safe, like with mortgages, loans to sovereigns and AAA rated securities, than with what’s perceived as risky, like with loans to small and medium enterprises and to entrepreneurs.

That means clearly that banks are allowed to earn higher expected risk-adjusted returns on equity with “the safe” than with “the risky”; without any consideration given to the purpose for which the financing is to be used. In essence, regulators have decreed that “the safe” are worthier borrowers than “the risky”.

And of course, since risk taking is the oxygen of any development that is doomed to negatively affect the productivity of the economy.

Sir, I’ve written hundreds of letters to Mr. Wolf about “imprudent risk-aversion” for over more than a decade, and so of course I am glad he has reached the stage of “rather suspecting” all this is true. 

Wolf here refers to a report prepared for the Labour party by Graham Turner of GFC Economics that as a solution mentions, “the establishment of a “Strategic Investment Board” to deliver the government’s industrial strategy, use of the Royal Bank of Scotland to deliver lending to small and medium businesses and creation of an “Applied Sciences Investment Board” to deliver public sector financing of research and development.”

How can I convince Wolf that long before any statist Hugo Chavez like ideas that he still considers “half-baked” are tried out, we need to get rid of the distortions produced by the risk-weighted capital requirements for banks.

As Martin Wolf mentions, it could start with someone “wondering why securing financial stability is the only official aim for bank lending”; perhaps adding for emphasis the why on earth, in all bank regulations, there is not a single word of the purpose for banks beyond that of being safe mattresses into which to stash away cash.

But we could also question for instance BoE’s Mark Carney and Andy Haldane, on why they believe that what is made innocous by being perceived as risky, is more dangerous to the bank system than what is perceived as safe.

PS. On “the City of London being a global entrepot with little interest in promoting productive investment in the UK” I can only remind you and Wolf that could precisely be one of the reasons for why George Banks decided to quit banking and go fly kites instead