Banks, please, go get yourselves a new class of shareholders

Sir, John Authers writes that bank returns on equity are projected to fall from around 20 percent to 7 percent, much because of new capital requirements coming up in Basel III, “Bank´s adjustment to the IT threat has barely begun” January 28.

And then he describes and analyzes some suggestion of McKinsey on how banks should confront this change. Strangely enough I do not see this change of return in bank equity viewed from the perspective of a change in its risk profile, or the suggestion of “go get yourselves a new class of shareholders”.

If the 7 percent on equity bank returns are perceived to derive from a much safer operation there is no reason why bank division currently valued at 60 percent of their book value by investors in search of big returns, could not be valued at least at one time book value by pension funds, insurance companies and widows or orphans in search of more stability.

In fact the real economy would probably very much welcome the banks becoming less of the biggest beneficiary of it.

What I would look for, as a bank investor.

Sir, Sebastian Mallaby writes “Breaking up thebanks will win investor’s approval” July 18, and this is absolutely correct, provided we do not consider the costs and the dilutions that must result for those breakups to be successful… there might be a lot of alimony to be paid. 

But, as it could be of interest to some of your readers, let me expose what I would be looking for, as a bank investor. 

The first thing I would want from the bank is that it dedicates itself exclusively to lending to what is officially considered as “risky”, like small business and entrepreneurs, and for which the bank is required to have capital... which of course means that I as a shareholder will count. 

In other words, I would abhor my bank to lend to anything that is officially considered as “absolutely safe”, for 4 reasons: a.- it will probably mean they will be less careful, b.- they can do so with much less bank capital and so therefore as a shareholder I become less important, c.- it is only in what is considered as not risky that the banks can build up that type of exposures that can lead me to lose it all, and d.- if I want to invest in something perceived as “absolutely not risky”, I certainly do not need a bank for that… we can all read the credit ratings.

By the way, I suppose you know about "risk-adjusted rates of returns"