Competition among banks is healthy for all, except when banks are allowed to compete on stratospheric capital leveraged heights.

Sir, Nicholas Megaw reports on some natural concerns derived from the fact that “Britain’s banks and building societies are loosening lending standards and cutting fees to maintain growth, as competition and a weakening housing market squeeze profit margins.” “UK banks loosen mortgage standards to maintain growth” August 26.

Competition among banks is always good, what were we borrowers to do without it? If as a result, some banks fail, so be it, and in fact that is quite necessary for the long-term health of the system. 

But when competition occurs where regulators allows too much leverage, because they also perceive it as very safe, then the very high exposures to the same class of assets, by many banks, can really explode and endanger the bank system.

So in conclusion, welcome the lowering of lending standards for loans to entrepreneurs that bank competition can bring about; but the capital requirements for banks when financing residential mortgages need to be increased, in order to make competition less dangerous. 

PS. Here is the somewhat extensive aide memoire on some of the mistakes in the risk weighted capital requirements for banks.

@PerKurowski

If bank regulators in Brussels imply for instance an AAA credit rating for Greece, should Esma not also fine them?

Sir, Nicholas Megaw and Chloe Cornish report that the European Securities and Markets Authority has fined Moody’s for “negligent breaches” of the credit rating agencies regulation “Brussels slaps €1.2m fine on Moody’s” June 2.

As Jim Brunsden and Guy Chazan reported on June 1, Brussels applies a zero risk weight to the European sovereigns. That of course can only be compatible, according to the standardized capital requirements of the Basel Committee, with the absolutely clearest AAA credit ratings.

AAA is clearly a nonsensical credit rating for many European sovereigns, like Greece, and so the question remains should Esma not fine also those European bank regulators in Brussels?

@PerKurowski