How on earth did we end up discussing bank lending ratios of 25 or 33 to 1?

Sir, Alistair Darling, the former UK chancellor of the exchequer, refers to the Vickers proposal of bank capital of 4 percent, a lending ratio of 25 to 1 and to George Osborne’s proposal o 3 percent, a lending ratio of 33 to 1. He also rightly “suspects” that a requirement to hold more capital is a far greater buffer against calamities than a ringfence. “In a crisis, it will take a firewall not a ringfence” February 5.

And I must ask, how on earth have we ended up discussing bank lending ratios of 25 or 33 to 1? Don’t we all realize these lending ratios are sheer lunacy? Even if a bank loans are solely to “the absolutely infallible”? What funny thing happened on the way here?

No! Banks need to hold more capital, I would say between 8 or 10 percent, and, if they don’t have that capital, then help them get it for Pete’s sake, by for instance introducing special tax-exemptions on dividends produced by any banks willing to hold a basic 8 or ten percent in capital against all its assets.

That would not only help to make our banks safer, it would also reduce the distortions produced by different capital requirements based on the perceived risk of the bank asset, and it could also lead to attract a new set of shareholders, like some widows and orphans, who would be willing to accept lower bank returns in exchange for a much lower risk.

Sir, the simple truth is that the real economy cannot afford paying off those speculative shareholders who could be attracted to banks allowed to leverage 25 to 1. It is as easy as that!

What happens to the environment is indeed a risk that finance ministers should talk more about

Sir the finance ministers from the US the UK and Japan speak with one voice when in “Financial bridge from dirty to clean” February 8, they say that without a global investment framework built on market incentives the global deployment of clean energy technologies is going to be very difficult but they also note that not doing so will be very risky for us all.

Well this is exactly the sort of real societal risks that were ignored by financial regulators when they designed the minimum capital requirements for banks based on a very narrow definition of risk namely that of a default. If a default occurs because someone was trying to help the planet it would seem like something more acceptable to the society if there were no default but the bank was financing the purchase of a new car that will produce more carbon.

It is not that I am saying that banks should take stupid risks in environmental protection projects…but neither should finance ministers through their regulations create non-transparent subsidies for what just the credit rating agencies believe are low risk projects while ignoring all other risks faced by humanity.

If a bank lends a AAA corporate client a 100 dollars the bank need 1.6 dollars in capital if it lends to riskier below BB- reacted environmental project the bank needs 12 dollars in capital. Is this what the minister’s mean with market incentives?