And now, decades too late, FT publishes an article by LBS’s David Pitt-Watson mentioning that finance needs a purpose

Sir, David Pitt-Watson, an executive fellow of finance at London Business School writes: “Few had spotted… chronic failures in the system; for example, that on the best evidence available, for more than a century, the financial system has created no productivity increase in its task of taking our savings and investing them in productive projects”. And “that’s why LBS has introduced a new required course for its masters in finance, [which he teaches] called the Purpose of Finance.” “Students must learn the purpose of finance” June 20.

I am a London Business School, Corporate Finance graduate, 1980. Since my first Op-Ed in 1997, and then as an Executive Director of the World Bank 2002-04, and afterwards, I have held, among other in around 50 not published letters to FT, that bank regulators, so irresponsibly, never ever defined the purpose of banks before regulating these, and so completely ignored that the main purpose of banks was to allocate efficiently credit to the real economy.

In 2007 I even sent a letter to FT commenting on an article by David Pitt-Watson, in the sense that he had not understood the role of regulators in creating the distortions in the allocation of bank credit.

My problem was, and is, that I did, and do not, belong or behave, in accordance to the mandates of any inner circle, whether of LBS or FT.

Therefore when Pitt-Watson writes: “Before we launched the course, I researched what other masters in finance degrees taught. I could not find a single one that is explicit in teaching about purpose,” he is confessing to the worst of problems… the groupthink of regulators, of finance professors and of financial journalists.

I am pinning my hopes on artificial intelligence. That has at least no ego that refuses to admit to its mistakes.

And artificial intelligence would never ever have risk-weighted BB- rated assets at 150% and AAA rated at 20%. It would have known that banks would never ever create excessive financial exposures to what is perceived as risky, that only happens with assets ex ante perceived as safe.

@PerKurowski ©

Scrap credit risk weighted capital requirements for banks and base it on sustainability and job creation instead.

Sir, I refer to David Pitt-Watson’s “‘Fossilist’ finance is proving a hindrance to the ‘clean trillion’” October 8. Again, for the umpteenth time, I make a suggestion that has steadfastly been ignored by FT. I am sorry, to be repetitive, but if that is what it will take, that is what I will be.

Intro: The pillar of current bank regulations is the credit risk weighted capital requirements. More perceived risk more capital and less perceived risk less capital. That so as to serve as an inducement to stay away from what is risky allows banks to earn much higher risk adjusted returns on “safe” assets than on “risky” assets. And that is one utterly purposeless and dangerous piece of regulation.

Purposeless, because of course the perceived credit risk has not one iota to do with if the credit is going to be used for a good societal purpose. There is not one word that defines the purpose of banks in all current regulations.

Dangerous, because it tempts banks to build up excessive exposures, against little capital, precisely with those assets that can cause major bank crises, that what is perceived as safe. What is perceived as “risky” takes care of itself with high risk premiums and low exposures.

And so Sir, it should be clear that current regulations also constitute a major hindrance to the ‘clean trillion’… just like they for instance by impeding the fair access to bank credit of “The Risky”, like SMEs and entrepreneurs also constitute a major hindrance for job creation. 

And so here again is my proposal:

First, scrap those regulations and set the same capital requirement against all assets, so as not to distort the allocation of bank credit. Initially, considering the sorry state of the economy, what is probably required is diminishing the capital requirements for what is risky, to about the level of capital banks already have against all assets.

Then, and only then, and after having clearly explained why, lower slightly the capital requirements against assets that can obtain very good ratings in terms of how they assist sustainability and how they can help create jobs for the next generation. That would allow banks to earn more, on what we all are glad they can earn more.

God make us daring!

PS. Since David Watson is an executive fellow of finance a London Business School, I want to inform him that from mid 1979 until mid 1980 I took their Corporate Finance Evening Course.

@PerKurowski ©  J

This time it was in fact the regulators who started the whole craziness

Sir David Pitt-Watson tells us that the “Lessons of the credit crisis are not just for regulators” December 5, and of course he is right, who argues the opposite? But when it comes to accountability it might be important to state that this should also be applicable to regulators.

Pitt-Watson mentions that “To be assured that these loans were credit worthy the market passed on this accountability and responsibility to credit rating agencies” but he forgets that, in the case of the banks for example, it was actually the regulators, by means of how they calculate the minimum capital requirements, that basically ordered the banks to make the credit rating agencies their pipers, and I have not yet heard the first regulator being fired, paying a fine, or even named and shamed for doing a crazy thing like that. On the contrary they seem all to be fine and dandy and ready to help out again…with our taxes.