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

Me, London, regulators, banks, lions, pussycats and FT’s pink

In 1979-80 I spend a year in London, taking corporate finance at London Business School (evenings) and assisting to classes on International Economics at London School of Economics, and doing an internship at Kleinwort Benson, one of those traditional daring British merchant banks I so much admired. And of course, during that year, the pink Financial Times was my daily read. 

But some 30 years later, the banks have now been castrated by regulators, not allowed to be daring any more. This they did giving the banks extraordinary incentives to lend to “The Infallibles” and, if a bank wants to remain competitive in the markets, making it almost prohibitive for it to lend to “The Risky”. And, since FT seems not at all concerned about that, now, its pink begins to bear a quite different connotation to me.

How sad… and that sentiment goes for British banks too…. Lions forced to be caged pussycats… forgetting how to hunt and getting dangerously obese eating mice.