Bankers instead of being savvy loan officers generating growth, have turned into dangerous addicted equity minimizers

Sir, Ben McLannahan quotes Paul D’Onofrio, the chief financial officer at Bank of America, with that he welcomed any “refinement” to rules that “allows us more access and control over our capital [and] liquidity in support of responsible growth”, “End of the crisis-era growth taboo at US banks”, October 19.

Sir, that is a recipe for disaster. First it will of course lead to that banks will go on minimizing the equity they hold, trying to leverage more, so as to earn higher risk adjusted returns on equity. That will not make banks safer or, most importantly, make them allocate credit efficiently to the real economy. 

The result is that banks will keep on lending too much to what is perceived, decreed or concocted as safe, against too little capital; something which is the perfect recipe for bank system failures.

And that banks will lend much less than what they should, to those that are perceived as risky, like for instance to SMEs and entrepreneurs, something which is the perfect recipe for a stagnating economy.

Tim Adams, president and chief executive of the Institute of International Finance, with reference to the Fed’s mandate mentions: “I think there’s a different mandate now, [which is:] how do you ensure the system is safe and sound and resilient while also ensuring you have balanced growth and that financial institutions can support economic activity?”

Sir let me tell you how! By having one single capital requirement, like a reasonable ten percent, to apply to all assets, except cash.

McLannahan also writes that Mike Mattioli, a portfolio manager at Manulife Asset Management in Boston opines: “Reasons to be upbeat include growth in mortgages, a return of “animal spirits” in small-business borrowing, and a “little bit more leverage” in balance sheets, as regulators allow banks to return more capital in the form of dividends and share buybacks.”

“Growth in mortgages”: Sir, do we really need much of that?

“A return of “animal spirits” in small-business borrowing”: Sir, while that requires banks to hold more capital than against other assets, the banks will not be there to lend to these “risky” borrowers.

“Regulators allow banks to return more capital in the form of dividends and share buybacks so “little bit more leverage”: Sir, that really sounds scary, as that would indicate regulators have not understood anything about what is going on. Bankers instead of maximizing returns on equity by being savvy loan appraisers have now for that turned into addicted equity minimizers.

​PS. FT​'s continuing lack of curiosity is astonishing

@PerKurowski

With capital requirements based on a perceived risk already cleared for, do not banks overdose on perceptions?

Sir, Tim Adams, in a letter on July 16 that comments your editorial “In praise of bank leverage ratios” (July 11) writes that “Given the lessons of the crisis, it would be unwise to rely on a measure that does not take into account the riskiness of banking assets…. Let’s focus on strengthening the existing framework and avoid incentivising firms to shift to the riskiest assets, which could only sow the seeds of another crisis.”

I do not understand. What crisis did Mr. Adams see, and what lessons did he learned? I say this because the crisis I saw was 100 percent the result of incentivizing banks to move excessively to the “safest assets”, those which allowed banks to hold the least capital, those which allowed the banks to earn the highest expected risk-adjusted returns on their equity.

Banks already take the ex ante perceived risk into account when setting interest rates, deciding the amount of the exposure, and defining any other term, and so why should banks also consider exactly the same perceived risk in their capital. Does that not guarantee that banks will overdose on ex-ante perceived risk?

I have posed that last question to the regulators for many years, and never received an answer. Maybe the President and CEO of the Institute of International Finance, Washington, DC, US could help me and the regulators providing an answer?