Much of those interest margins banks now obtain financing what’s perceived safe, used to belong to pension funds.

Sir, I refer to Mary Childs and John Authers’ “Canada quietly treads radical path on pensions: Retirement funds are pushing beyond bonds and stocks in search of better returns” August 23.

Please hear me out. Before the introduction of the risk weighted capital requirements, banks spread out their credits to those who offered them the best risk-adjusted margins, while subjecting the size of the exposures to the same perceived credit risk. Taking risks, with reasoned audacity, was the business of the banks. In comparison, avoiding risks, and looking for certain minimum returns, was the business of pension funds.

But, with the risk weighted capital requirements that allow banks to leverage much more their equity with what is perceived as safe than with what is perceived as risky, banks began maximizing their returns on equity by minimizing the equity they needed to hold, something which meant going for what was perceived, decreed or concocted as safe.

As a result the bankers were able to realize their wet dreams of huge perceived risk adjusted returns on equity for playing it safe.

But that de facto meant that banks occupied the investment space pension funds use to occupy, and so now we have that pension funds have to go out there and take the risks banks used to take.

Sir, you can be damn sure that if banks needed to hold the same capital against all assets they would not be swamping the safe havens, and pension funds would not have to be “facing the challenge of [so] low returns on traditional assets”

This is all so foolish. Why can’t we allow banks to be banks and pension funds to be pension funds?

This is all so dangerous. If banks do not finance risky SMEs and entrepreneurs the real economy will stall and fall, and then even the safest will not buy retirement tranquility (or jobs for our children and grandchildren).

Bank regulators minimizing the social impact of banks more than neutralize the social impact maximizing investors.

Sir, Stephen Foley and Adam Samson quote write about the efforts of Pope Francis to champion ‘impact’ investments, “FT Big Read. Investment: Blessed returns” June 17.

And Pope Francis is quoted with: “It is increasingly intolerable that financial markets are shaping the destiny of peoples rather than serving their needs”. I believe that having a tête-à-tête with the Basel Committee for Banking Supervision, could serve the Pope better than speaking with social impact investors.

The pillar of current regulations, the risk weighted capital requirements for banks, allow banks to earn higher risk adjusted returns on equity, for no other purpose than that to avoid ex ante perceived credit risks. That’s a very a poor objective for those who have a prime responsibility of allocating bank credit efficiently to the economy.

As a result those perceived safe, those who because of that already have plenty and cheaper access to bank credit, now find even more generous terms, while those perceived as risky, like SMEs and entrepreneurs, those who already had less and more expensive access to bank credit, have to fight much harsher conditions.

Clearly that regulation only guarantees to diminish the social impact of bank lending. It is the direct consequence of regulators regulating banks, without defining the purpose of these. That is an unpardonable irresponsibility of them!

Social impact based capital requirements for banks, which would allow banks to earn higher risk adjusted returns on equity when producing a high social impact, could sound as an attractive possibility, but is not free from dangers. To base capital requirements for banks on for instance the GIIN list of 559 metrics, those ranging from ‘greenhouse gas emissions avoided due to products sold’ to the number of suppliers who were minority/female/low income” could be gamed and also distort credit allocation in many other ways.

But, just to require the Basel Committee to answer a question of whether bank credit should not have a social impact, could open up a much-needed discussion on the need of eliminating the current regulatory discrimination based on perceived credit risk.

@PerKurowski ©