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 

@PerKurowski

To allow banks to regain public trust and better serve the UK economy, begin by explaining how their regulators distorted banking.

Sir, you write about “the highly concentrated nature of the UK system, which is dominated by a handful of large institutions, with balance sheets skewed towards mortgage lending and other forms of consumer finance” and of a popular resentment of banker’s pay, “Corbyn’s calculated ‘threat’ to the banks”, December 2.

Banks’ balance sheets are skewed towards less-capital or very high risk-premiums, like lending to the sovereign, mortgage lending and other forms of consumer finance

Banks’ balance sheets are skewed away from what requires holding more capital and cannot afford to pay too high rates, like SMEs and entrepreneurs.

If you required banks to hold as much capital for all their assets as they must hold when lending to SMEs and entrepreneurs, then the story would be much different.

If you allowed banks to hold slightly less capital against loans to SMEs and entrepreneurs than against all other assets, that would more than compensate for the lack “of community banks or Sparkassen”; and introduce such economic dynamism that it could more than help you to confront any Brexit difficulties.

If banks needed to hold more capital in general, and therefore needed to compensate shareholders more, then there would be less available space for current abnormal banker bonuses. Ask Sergio Ermotti how much he has to thank regulators for his bonuses.

So, how to ensure that the banking sector can regain public trust and better serve the needs of the UK economy? Sir, why not begin by explaining what the bank regulators have done. We can of course not ask the bankers to explain that.

Oops, but that would mean you would have to explain why you have silenced my soon 2.700 letter to you on this, and that could be too embarrassing for one with your motto.

A brief aide memoire

@PerKurowski

The risk-weighted capital requirements, using Martin Wolf terminology, sound like voodoo Corbynomics.

Sir, Martin Wolf explaining, “Why has European social democracy been such a success?, [mentions the ] “government… must recognize the crucial role of incentives in shaping human behavior… [and] it must understand that the private sector, foreign as well as domestic, must play a leading role in the economy.” “The calamitous consequences of Corbynomics”, October 6.

I fully agree with that, but what I then cannot understand, is how Wolf is so utterly indifferent to the distortions produced by the risk weighted capital requirements for banks.

First, by allowing banks to leverage differently different assets, these create irresistible incentives for banks to finance what is perceived, decreed or concocted as safe; and to stay away from financing what is perceived as risky, like unrated SMEs.

Then by assigning a 0% risk weight to the sovereign it clearly states, loud and clear, that the government and its spending bureaucrats have the right to especially favorable bank credit, presumably because they allocate resources more efficiently than the private sector.

Sir, in Wolf terminology, that sure sounds like pure voodoo Corbynomics to me.

PS. The following link takes you to a litmus test all aspiring central bankers and bank regulators should take.

@PerKurowski

You want faster growth? You want more widely shared growth? Then get rid of current bank regulators.

Sir, Martin Wolf writes: “This is the time to develop ideas on how to achieve the party’s priorities of faster, more widely shared growth” “Two cheers for Corbyn’s challenges to economic convention” October 2.

You want faster growth? Then take away the odious regulatory discriminations against the risky and let the SMEs and entrepreneurs, the tough we need to get going when the going gets tough, have fair access to bank credit.

I quote from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

“For the new parts of the country [USA’s West]… there was the right to create banks at will and therewith the notes and deposits that resulted from their loans…[if] the bank failed…someone was left holding the worthless notes… but some borrowers from this bank were now in business...[jobs created]

It was an arrangement which reputable bankers and merchants in the East viewed with extreme distaste… Men of economic wisdom, then as later expressing the views of the reputable business community, spoke of the anarchy of unstable banking… The men of wisdom missed the point. The anarchy served the frontier far better than a more orderly system that kept a tight hand on credit would have done…. what is called sound economics is very often what mirrors the needs of the respectfully affluent.

You want more widely shared growth? Then take away the odious regulatory discriminations that stops banks from giving the risky SMEs and entrepreneurs the opportunity to fair access to bank credit they deserve.

I quote again from John Kenneth Galbraith’s “Money: Whence it came where it went” 1975.

“The function of credit in a simple society is, in fact, remarkably egalitarian. It allows the man with energy and no money to participate in the economy more or less on a par with the man who has capital of his own. And the more casual the conditions under which credit is granted and hence the more impecunious those accommodated, the more egalitarian credit is… Bad banks, unlike good, loaned to the poor risk, which is another name for the poor man.”

But the sad fact is that no new or old Labor, or anyone, would be able to get that advise from a brains trust of seven left-of-centre economic advisers who have never been out on Main-Street, who hate government austerity, but who love bank credit austerity.

Our formal banks have been embraced by a loony regulatory risk aversion that wants to clear, in the capital of banks, the perceived credit risk already cleared for by banks with risk premiums and size of exposures. Or we free them for that or the interests of economic growth, job creation and equality might be best served by unregulated banks operating in the shadows… a la Banca Sommersa style.

@PerKurowski