Lord Turner, peer to peer lending P2P, stands no chance of satisfying the needs banks were instructed not to fulfill

Sir, Ruth Gillbe reports in FT’s Adviser that Lord Adair Turner now opines "peer-to-peer lenders … might be able to do credit underwriting as well as established banks”. “Lord Turner u-turns on P2P mis-selling” October 12.

No, let us hope they can do it much better, and for that a prerequisite is for the scheming and hubris filled bank regulation technocrats, to stay out of their way.

Let us be clear, the P2P lending is taking off, somewhat, much because regulators, such like former chairman of the Financial Services Authority Lord Turner, with their risk weighted capital requirements, gave banks incentives to go only to where it was perceived, decreed or concocted as “safe”, and stay away from what was perceived as “risky”

Sir let us hope (pray) these regulators wake up and stop distorting the allocation of bank credit; since just with P2Ps it will not be enough to get our economies going again.

Chances of that are slim though. Can you imagine a Lord Adair Turner bowing humbly and asking for forgiveness, like a failed Japanese executive could do? 

@PerKurowski ©

The reason why banks “dance around tough capital rules” is that regulators play the music that invites them to do so.

Sir, I refer to Gillian Tett writing about hedge funds and banks moving into the P2P sector, “The sharing economy is a playground for Wall Street” September 25.

Ms. Tett writes: “banks used structured investment vehicles and collateralised debt… to dance around tough capital rules”.

That ignores that the reason why banks can “dance around tough capital rules” is that there are different capital rules. If for instance banks needed to hold for instance the basic Basel II capital requirement of 8 percent against all assets, there simply would be no music to dance to.

And Ms. Tett writes: “the system needs to provide more credit to the economy, in order to boost growth… If you ask bankers why they are moving into P2P lending, some will point to the high returns they hope to earn (since the average loan commands an interest rate of around 13 per cent, margins are high).”

Does Ms. Tett really believe that loans at 13 percent, in an almost zero rate environment, will help boost growth?

And Ms. Tett writes: “if you think that the main goal of finance should be to create safe, clear rules for capital flows… then the arrival of banks and hedge funds [to P2P sector]… might make you weep”

Ms. Tett still does not understand what is going on. Risk weighted capital requirements give banks the incentive of being able to leverage their equity immensely when lending to those perceived safe; and which forces the “risky” to have to pay both a bankers’ risk premium and a regulator’s risk premium. The natural result is banks will lend dangerously much to the safe and dangerously little to the risky… and that is what should make us weep.

And Ms. Tett writes: “[Banks] also took advantage of cracks in regulatory structures to create products that policymakers could not easily monitor or control (it was unclear, for instance, who was supposed to oversee mortgage derivatives).” 

What cracks? Basel II clearly spelled out that if a security was monitored by one of the few credit rating agencies, and obtained an AAA rating, then the banks could leverage 62.5 times to 1 their equity. 

And Ms. Tett writes: “unlike the pension funds which were exposed to mortgage-backed securities in 2006, for example, the banks and hedge funds understand the dangers of credit losses.”

I am not sure I would agree with that assessment. Too many banks, especially European had no understanding at all of the dangerous amounts of credit losses that could happen if the demand for mortgages to be packaged in securities, exceeded by much the capacity to rationally finance the purchase of houses.

Sir, since January 2007 I have written you around 150 letters in reference to articles by Ms. Tett; and of course copied her. Most of them have to do with explaining why credit-risk weighted capital requirements for a bank is such a flawed and dangerous concept. Even if I assume she has not read one single of those letters, she should have learned more about it after so many years.

Ms. Tett as the expert in anthropology you are: What would have happened with humans had some Basel Committee nannies given them so much incentives to stay safe in their caves and not venture out into the risky world? May I advance the possibility they would have ended up extinguished in their safe caves?

Per Kurowski

@PerKurowski

If Europe (and America) does not free itself from runaway control freaks… game´s over.

Sir, John Kay writes “Regulators will get the blame for the stupidity of crowds” March 26 though what is most urgent in the Western world, so that accountability would mean something is that regulators should be blamed for their own stupidity.

Kay writes “Naivety is as much of a problem as criminality. Most businesses plans read persuasively- until…” Indeed, but rarely have we seen something as naïve as bank regulators who thought and still think that with their trick of risk-weighing the capital requirements, they could produce safe banks without producing dangerous negative ripples in the real economy.

Kay writes about concerns “about the availability of funds to small and medium sized businesses” and holds “The flow of intermediation is blocked by the debris of bank failures”. Wrong! That flow of intermediation of funds is primarily blocked by the fact that regulators require banks to hold more capital against it than against the flow of funds to for instance the “infallible” sovereigns or to the AAAristocracy.

Kay concludes mentioning that there were some institutions which provided “the new P2P lending and equity crowdfunding services… They were called banks.” But, instead of begging for banks to return to what they were, he calls for the regulators to make sure that what´s new should be “operating in a more closely regulated environment”. Frankly!

Let me phrase it the following way. Every time a bank credit in Europe (or America or anywhere else) is not given to a small and medium sized business, only because these cannot provide the banks with a competitive return on equity as a result of higher capital requirements, a door, behind which we could find the luck needed to power our future, has been shut.

Now if only regulators allowed banks to be banks again.

Sir, Patrick Jenkins writes about “a small manufacturing company… looking for £150,000 of working capital. It is traditionally the kind of need that might have been met by a bank loan. But, in the post-crisis world of bank belt-tightening, it is now the bread-and-butter of upstart peer-to-peer (P2P) lenders. “Why peer-to-peer lending remains inherently unsafe”, July 23.

No, this is not the result of a “post-crisis belt-tightening” but of pre-crisis bank regulations, Basel II, June 2004, which required banks to hold immensely much more capital (equity) when giving loans as that described, than when lending to the sovereign or the AAAristocracy.

And Jenkins correctly writes “Banks might have done themselves and the world a lot of damage in recent years, but they are still better judges of lending risk than the average investor”. Indeed they are, and they would be the best at handling such loans, if now regulators only allowed the banks to be banks again.