Bank fines should be paid with bank equity, not with cash, unless we are masochists and want to be cruel to the economy.

Increasing the capital requirements for banks in the midst of a slow economy, while at the same time eroding bank capital with fines, is sheer economic cruelty… pure masochism. And especially so against those who for which cruel regulators decided, for no other reason that they think that to be a great idea to keep banks safe, that banks need to hold especially much capital when lending to them, like the SMEs and the entrepreneurs.

Sir, with respect to the reimbursement of claims for mis-sold insurance, you write that “As of this year, banks have already paid out about £20bn” and at long last take notice of that “The consequent erosion of banking equity can hinder credit provision in ways that damage the economy as much as the stimulus has helped” “UK banking’s sorry tale draws slowly to a close” October 3.

At long last FT! £20bn times a prudent level of 12 to 1 leverage gives you £240bn less lending capacity… at current imprudent sort of 30 to 1 leverage that would signify £600bn less lending capacity.

I hold “At long last FT!” because I have written you several letters on this problem but that, as usual, for your own internal reasons decided to ignore.

But I repeat. We must find a new way of imposing fines on banks. I have suggested that instead of cash banks pay in new shares issued at current market value. These shares if paid to the State could be non-voting and if paid to persons, like in this case, could include preferred dividends for some years.

PS. Having those mistreated by banks become their shareholders, seems like a innovative way of educating banks  J 

PS. Allowing authorities decide at each moment in what proportion of cash or equity these fines should be paid, would give them a new countercyclical tool  J

PS. The payment in bank shares should apply, of course, to all legal fees too J

PS. How come so many that loudly complain about government austerity loudly support bank credit austerity… do they all carry the virus of statism in their hearts? L

@PerKurowski

Is Ermotti suggesting UBS tinkers with risk measuring, like Volkswagen tinkered with pollution emissions measuring?

Sir, I refer to your most important editorial in over a decade, “Banking cannot prosper within a culture of fear”, September 24.  A more correct title would be: “Our economies cannot prosper when bank regulators have been overtaken by a culture of senseless fear”.

You, who proudly proclaims a “Without fear”, seem to at long last have to come to grips with the fact that risk-taking is much needed in order to avoid even worse risks. Sadly, you should at the latest, have written that in June 2004 when Basel II was announced.

Then silly risk adverse regulators, who clearly had never read The Parable of the Talents, imposed a culture of fear of “The Risky” by excessively embracing “The Safe”. Its risk-weighted capital requirements, clearly instructed banks to avoid taking risk on The Risky, by giving them permission to leverage incredibly, much riskier, with what is perceived ex antes as safe.

And you write: “Sergio Ermotti, the chief executive of UBS, has been so bold as to urge his staff to embrace risk-taking again”. Great, and of course I agree full heartedly with him. That is our responsibility towards those coming after us. God make us daring!

Unfortunately, Ermotti can urge his staff to embrace-risk taking as much as he wants, that will still not happen, not as long as the credit-risk weighted capital requirements remain in place. That is of course unless Ermotti is now suggesting that UBS tinkers with risk measuring, along the way Volkswagen tinkered with emissions measuring.

PS. On a personal note I wish of course you would have had the decency to at least acknowledged that this, Basel’s dangerous regulatory risk aversion, has been the leitmotiv in the over thousand of letters I sent you, which you preferred to ignore. The letters though are still all out there on my http://teawithft.blogspot.com, for the world to see.

PS. When bankers grow old and begin to fade away... what would they regret the most, the risk they took or the ones they did not dare to take?

PS. Here I have a brief YouTube explanation, in red and blue, of our crazy bank regulations.

@PerKurowski