What the $150bn in US fines paid by banks has caused the real economy, can best be described as financial sadism

Sir, Kara Scannell writes: “Demands for accountability ushered in an era where the US government was willing to penalise financial institutions severely, yet most crisis-related actions were civil rather than criminal and few bankers went to prison” “Banks rack up $150bn in US fines since start of the financial crisis” July 7.

If we use Basel II’s basic capital requirement of 8%, that represents an authorized leverage of 12.5 to 1. If we multiply that number times the $150bn in fines paid by banks, we can see that the real economy might have obtained $1.9tn less access to credit.

And of course, punishing the shareholders of banks that way, must cause the cost of bank capital to increase and, as a result, borrowers having to pay more for loans.

And of course, banks tight on capital, will not lend to what requires them to hold more capital, which currently means those perceived as risky, like entrepreneurs and SMEs, something that can only reduce the dynamism of the economy.

Sir, that is pure and unabridged financial sadism. That amount of killed bank credit potential represents about 50% of the Fed’s current QE balance. Need we say more?

PS. I remember having written a similar comment about 3 years ago.

@PerKurowski

When financing art, should Old Masters be credit rated based on their value volatility?

Sir, I refer to John Dizard’s discussion of “the business of lending against art collateral”, “Art world may be struggling but lenders are still happy to rely on an Old Master” February 6.

Dizard writes about a “an avalanche of loan applications from Europe” but “the banks that made lending facilities available in the past are not doing so any more” because the banks “are under tremendous regulatory pressure. Every European bank is scrambling for sufficient capital.”

It is a very interesting article. But, sincerely, should FT not be much more concerned with all the financing of SMEs and entrepreneurs that is not happening in Europe for precisely the same reasons… namely that capital scarce banks are allowed to hold much less capital against assets ex ante perceived or deemed as safe?

That said… might there be room for credit rating of art? That could allow banks to hold less capital against some Old Master that possesses less value volatility. Or would that only incentivize the production of more AAA rated Leonardo Da Vinci fakes?

@PerKurowski ©