Regulators forced banks into what’s perceived safe, thereby forcing the usually most risk adverse into what’s perceived risky.

Sir, Robin Wigglesworth writes “Many investors such as pension funds and insurers [are] pushed towards the only other option: venturing into the riskier corners of the bond market, such as fragile countries, heavily indebted companies and exotic, financially engineered instruments. These are securities they would normally shun — or at least demand a much higher return to buy.” “Negative yields force investors to snap up riskier debt” August 16.

As an example he mentions “Victoria a UK-based company that issued a €330m five-year bond that drew more than €1bn of orders [because] the relatively high 5.25 per cent yield it offered, helped investors swallow misgivings over its leverage.”

Clearly liquidity injections, like central banks’ huge QEs, has helped to move interest rates much lower everywhere, but, as I see it, much, or perhaps most of what Wigglesworth refers to is the direct consequence of the risk weighted capital requirements for banks.

That regulations allowed banks to leverage much more their capital with what’s perceived (decreed or concocted) as safe, than with what’s perceived as risky, which meant that banks can more easily obtain higher risk adjusted returns on equity with the safe than with the risky… and those incentives were as effective as ordering the banks what to do. That made banks substitute their savvy loan officers, precisely those who would be evaluating and lending to a Victoria, with equity minimizing financial engineers.

As a result the interest rates charged to the safe… little by little forced those who did not posses savvy loan officers to take up the role of banks.

Will it stop there? Not necessarily. Banks, and their regulators, are now slowly waking up to the fact that the margins that the regulation benefited “safes” offer, are not enough for banks to survive as banks. 

But how to get out of that mess will not be easy. Solely as an example, when in 1988 bank regulators assigned America’s public debt a 0.00% risk weight, its debt was about $2.6 trillion, now it is around $22 trillion and still has a 0.00% risk weight. How do you believe markets would react if it increased to 0.01%? 

@PerKurowski

Bank regulators could derive valuable lessons from pension scheme difficulties.

Sir, Jonathan Ford while discussing Carillion’s pension schemes writes: “deficit repair should reasonably leave space for the company to foster future growth, and thus preserve the ongoing viability of the sponsor.” “Carillion’s pension crisis defies any magic legal cure” February 26.

Absolutely. But does that not apply to bank regulations too? As is the risk weighted capital requirements give banks huge incentives to stay away from financing the “riskier” future, like entrepreneurs, in order to refinance the safer present, like houses.

And Ford adds: The worst outcome would be one that simply encouraged trustees to “de-risk” schemes further by purchasing highly priced gilts to protect themselves against mechanical increases in short-term liabilities caused by falling market yields — a pro-cyclical practice known as “liability-driven investment”.

In essence that is what the risk-weighted capital requirements do. They doom banks to end up gasping for oxygen in dangerously overpopulated safe-havens against especially little capital, leaving the riskier but perhaps more profitable bays unexplored.

Ford argues: “It’s not clear though what any “tough new” rules could have done to help this messy situation.”

I know too little about Carillion but, what I do know, is that pension funds in general, government’s included, have been way too optimistic when estimating potential real rates of return in the order of 5% to 7%. 3% would be more than enough of an optimistic real rate of return, given the so many unknown factors out there.

@PerKurowski

If you want your sovereigns to have easier access to credit than your entrepreneurs, then you are not thinking on your grandchildren.

Sir, with respect to sovereign bond-backed securities you opine “bank regulation should be reformed to treat SBBS as favourably as national bonds in capital requirements — indeed, more favourably, since SBBS would make it less destabilising to have banks hold equity against concentrations of their own government’s bonds” “A rare chance to create a pan-eurozone safe asset” January 31.

What? Instead of a 0% risk weighting, these bonds collateralized with loans to sovereigns, should now have even a minus something risk weight percentage? So that banks can earn even higher expected returns on equity when lending to sovereigns? So that banks will lend even less to entrepreneurs. Sir, as a grandfather, let me tell you, that is a shameful proposition.

Defending the SBBS you argue: “the monetary union enjoys a well-deserved streak of growth”. Holy moly, what “well-deserved streak of growth” is that? Do you refer to that growth that has been financed by quantitative easing and by the low interest rates that makes it impossible for pension funds to live up to its offers? Come on! It is a totally undeserved growth… and one that will be very hard to repay.

You opine one should “create a truly pan-eurozone benchmark safe asset… the SBBS”

Sir, when you save, by investing in a bond, you should want the debtor invest your money well, so as to be able to repay you well. A eurozone SBBS seems here to be a bond designed so that no sovereign would have to repay it, and therefore no sovereign would be required to invest it well. Would you like your pension fund to invest in such SBBS with ultra low interest rates? 

And you also opine that “if issued in sufficient quantities, SBBS could help end the danger at the heart of the eurozone crisis: the “doom loop” between sovereign and bank debt. Banks holding senior SBBS would be safe from sovereign risk”

Sir, again, for the umpteenth time, that “doom loop” was created, in 1988, when regulators in their risk weighted capital requirements for bank assigned the sovereign a risk weight of 0% and the unrated citizens, those who form the backbone of any sovereign, a risk weight of 100%. And then I believe you said nothing about that!

@PerKurowski

How much will the fewer younger be willing to give up in order to help the larger number of older?

Sir, John Dizard argues that It is hard to have a tax cut-driven jobs boom for the ‘real Americans’ if there are fewer of them around” “Financial world’s promises impossible to meet within an ageing demographic” October 22.

Indeed, demographics will make all so much serious, but let us not assume things are going so as to be a rose garden without that factor.

The kicking the 2007-08 crisis can forward with QEs; the ultra low interest rates that makes it easier to take on debt and in some ways introduces economic laziness; getting equity out of homes like with reverse mortgages in order to spend; risk weight of 35% on financing residential houses and of 100% when lending to the riskier SMEs and entrepreneurs who have the best chances of building future and create jobs; a mindless 0% risk weight for so many sovereigns only based on that these can print money to repay… is driving the world towards a crisis not only because of the lack of young workers, but also because of excessive unpayable debts.

There will come a day when all those young living in the basements of their parents’ houses will say “Hey ma-and-pa, you go downstairs, now it is our turn to live upstairs”… and that is perhaps even the best case scenario. Things can get to be truly ugly (ättestupa)… except perhaps if we are able to put billion of robots to productive uses (like they are trying in Japan) and tax them and share out those revenues with a universal basic income.

I have always argued that the best pension plan that exists is having children and grandchildren that love you, and who are able to work in a workable economy. Thank God I got the first… but I am beginning to seriously doubt achieving the second. 

@PerKurowski

Where have all safe assets gone? Short time passing. Gone to banks and central banks. When will regulators ever learn?

Sir, Elaine Moore, with respect to ECB’s QEs writes: “From the moment the European Central Bank first announced plans to revive the eurozone economy with a mass bond-buying programme, financial markets have expected trouble. First the focus was illiquidity and mispricing — now it is scarcity”, “Mechanics exposed as debt pool starts to run dry” September 9.

How could scarcity not be? Basel II’s low risk weighted capital requirements plus Basel III’s liquidity requirements, have substantially increased the demand of banks for low 0% risk weighted sovereign debt. That together with Central Banks purchases of “safe sovereign debt”, for their own QEs, just had to create scarcity.

Now we can hear widows, orphans and pension funds ask: Where have all safe assets gone? And the answer is to banks and Central banks everyone. Indeed when will they ever learn.

The saddest part though is that, as a result of all this odious regulatory distortion, the 100% risk weighted SMEs and entrepreneurs, those who most need and could do good with bank credit, they are left out hanging dry.

Sir, if we do not finance the riskier future and only keep to refinancing the “safer” past, we’re toast… even if there is no global warming.

@PerKurowski ©

All projected interest/pension earnings, always depend on the real economy being able to deliver these down the line.

Sir, Keith Ambachtsheer writes: “If low investment returns are here to stay, those responsible for pension plans have a choice: wring their hands, or fulfill their fiduciary duty by rethinking what it means for the design of their schemes. Doing nothing is not an option.” “Long-term thinking will lead the way to improved returns” August 30.

Absolutely! But the long-term fiduciary duty should also include doing the best to reverse what has gotten us into this low interest rate and low economic growth environment.

That begins by protesting the risk weighted capital requirements, that which allow banks to leverage more, and to therefore obtain higher expected risk adjusted returns on equity, on assets ex ante perceived as safe than on assets perceived as risky.

It has distorted the allocation of credit causing the banks to populate (even dangerously overpopulate) the safe havens were traditionally widows, orphans and pension funds did their business.

Too low interest rates on public debt? How could it not be with risk weights of 100% for We the People and of 0% for the Government?

Let us also remember that if the real economy is in doldrums when the times come to cash in pension assets, whatever seems great now could be totally worthless.

Sir, if we do not rid banks from that regulatory introduced risk aversion that have stopped them from financing the future like lending to “risky” SMEs, and have them only refinance the “safer” past, then that future real economy is doomed to be in the doldrums.

@PerKurowski

Regulators tell banks “Occupy what’s safe”; and so expel widows, orphans and pension funds, to handle what’s risky

Sir, Brooke Masters reports on how the Security Exchange Commission is making sure that private equity industry duly manages conflicts of interest and treats its clients fairly. “SEC enforcers must keep bearing down on private equity” August 27.

But Masters also writes: “Historically, PE clients have been highly sophisticated. So they are either well placed to decipher complex investment contracts or rich enough not to quibble about extra fees. But that is changing. Public pension funds are shifting more and more of their money into private equity as they chase higher yields. Pension fund managers are far less experienced with the sector.”

Why did this happen? When regulators, with their risk weighted capital requirements told banks they could leverage more, and therefore obtain higher risk-adjusted returns on equity with assets perceived as safe than with assets perceived as risky, they made banks occupy that area in which, without leverage, widows, orphans and pension funds used to dwell.

So see what they done. By trying to make banks safer they clearly made life for widows, orphans and pension funds much riskier. That is what happens when regulators regulate with no concern about the impact their regulations will have.

And the saddest part of it all is that it is all for nothing. Major bank crisis are never the result of excessive exposures to what is perceived as risky, but always the result of unexpected events or excessive leveraged exposures to what was ex ante perceived as safe, but that ex post turned out not to be.

PS. For the sake of our children and future pensioners, I pray we can reverse this, and that there are still some bankers out there who know how to be bankers, and not only how to be equity minimizers. 

@PerKurowski ©

While central bankers ponder moving their targets, we should ponder the need of moving them out.

Sir, I refer to your “Central bankers ponder moving the goalposts” August 26.

Stock and bond markets are important but the banks are most often the financiers of the first stages of growth. So while regulators, with their risk weighted capital requirements, insist in distorting the allocation of bank credit to the real economy; impeding sufficient flows to what has been deemed as risky, like SMEs and entrepreneurs, there is no chance in hell that QEs, negative interests or whatever else central bankers might concoct will work.

Some want to make up for the regulatory risk aversion by designing special financing facilities, for instance to SMEs. That’s would be the wrong way, that would just make everything more complicated and even less transparent.

Frankly, when I read about what options central bankers are pondering, it all sounds like a Lilliput and Blefuscus debate, 2% or 4%, break the egg on the larger or on the smaller end. Perhaps, if they cannot get their act together, and before they take us further up the huge mountain of debts they talk down as quasi-debts, we should seriously ponder the need to move them out. 

Inflation targets, nominal value of GDP and such, means little for most on Main Street. For instance, as a grandfather, I would welcome some central bankers that would target future employment rates, in decent jobs of course; and were willing to index their respective retirement plans to my grandchildren’s success, and to the value of the pension and retirement plans of those of their generation.

Sir, the independence of central bankers, cannot signify they are not to be held accountable for what they do.

@PerKurowski ©

Much of those interest margins banks now obtain financing what’s perceived safe, used to belong to pension funds.

Sir, I refer to Mary Childs and John Authers’ “Canada quietly treads radical path on pensions: Retirement funds are pushing beyond bonds and stocks in search of better returns” August 23.

Please hear me out. Before the introduction of the risk weighted capital requirements, banks spread out their credits to those who offered them the best risk-adjusted margins, while subjecting the size of the exposures to the same perceived credit risk. Taking risks, with reasoned audacity, was the business of the banks. In comparison, avoiding risks, and looking for certain minimum returns, was the business of pension funds.

But, with the risk weighted capital requirements that allow banks to leverage much more their equity with what is perceived as safe than with what is perceived as risky, banks began maximizing their returns on equity by minimizing the equity they needed to hold, something which meant going for what was perceived, decreed or concocted as safe.

As a result the bankers were able to realize their wet dreams of huge perceived risk adjusted returns on equity for playing it safe.

But that de facto meant that banks occupied the investment space pension funds use to occupy, and so now we have that pension funds have to go out there and take the risks banks used to take.

Sir, you can be damn sure that if banks needed to hold the same capital against all assets they would not be swamping the safe havens, and pension funds would not have to be “facing the challenge of [so] low returns on traditional assets”

This is all so foolish. Why can’t we allow banks to be banks and pension funds to be pension funds?

This is all so dangerous. If banks do not finance risky SMEs and entrepreneurs the real economy will stall and fall, and then even the safest will not buy retirement tranquility (or jobs for our children and grandchildren).

All awful on the pension front

Sir, John Authers responsibly puts his finger where it hurts, the issue of whether there will be sufficient resources to provide those pensions that so many take for granted will be there, “Hunt for the middle ground to avert pension poverty” July 9.

And doing so Authers discusses the implications of defined benefit and defined contribution plans, especially in times of extraordinary low interests. His suggestion to find an in-between plan that takes a little from both, sounds very logical, though of course, unfortunately, that cannot guarantee either there will be enough to meet the needs and much less the aspirations.

But the state of the economy at the time of any drawdown of a pension also matters tremendously and, if bank regulators are allowed to continue distorting the allocation of bank credit, that state of the economy will be very bad.

The risk weighted capital requirements for banks are causing a dangerous overcrowding of the safe havens, like public debt to which a risk-weight of zero percent was decreed; and for the economy an equally dangerous lack of exploration of the risky bays, SMEs and entrepreneurs, and which got hit with a risk weight of 100%.

As a consequence banks are now mostly refinancing our safer past and not financing sufficiently our riskier future. And that bodes very badly for the future pensioners, and very badly for the future prospects of the pensioners’ last reserve and hope, their children.

PS. 2006 “My insecurities about the social security debate” 

@PerKurowski ©

The best pension security you can get is to have grandchildren who love you and who work in a not too bad economy.

Sir, John Plender valiantly discusses one of the most difficult and delicate current problems, namely if tomorrows pensioners will even come close to collect on their expectations, “Uncertainty clouds the outlook for pension funds” May 16.

And looking at the problem solely from the perspective of the current manipulated low rates he already concludes: “What we can safely posit is that an exit from the low or negative rates that cause the blight, however desirable for the pensions system, is unlikely to be a smooth and painless affair”

Add to that longer life expectancies, more robots - less job opportunities, already extremely high indebtedness, climate change, demographic changes, existing inequality and quite possibly much weaker economies… and we start getting the feeling that the only variables capable of balancing the disastrous pension outlooks… are those variables we do not even want to think of… down the line of epidemics and wars.

But how could it not be?

Never ever before has a generation consumed as much of any existing borrowing capacity to sustain its own consumption… so of course little is left for retirement.

And to top it up, we have had to suffer the risk aversion of manipulating regulators who do not want our banks to take the risks that building a healthy future economy needs.

When in the past I often protested the implicit promises of sustainable high rates of return of pension fund plans, I remember always ending up with that the best pension plan was to have children that loved you and who worked in an economy that was not too bad. And I have found no reason to change that opinion… much the contrary… although I now include loving grandchildren too J

PS. By coincidence I posted this opinion on pension funds and social security exactly 10 years ago (on my 56th birthday)

Who buy 50-year and negative yield bonds? Those who are not to be held too much accountable in the short term?

Elaine Moore writes that “Spain lures investors with 50-year bond” and Eric Platt in “Munis welcome the world’s yield starved” of May 13, writes about almost $10tn of bonds globally carrying negative yields”.

Who are those buying 50-year and negative yield bonds? Have those buyers anything to do with ordinary investors, like you and me Sir? Are we really talking about investors needing yields because they hurt in their own pockets or are these investors managing other not clearly defined peoples money, like pension funds, with the push comes to shove moment so far away they do not feel too much accountable to anyone, now.

Sir, in order to gauge the market better we might very well need to have the market data refined based on the type of investors.

@PerKurowski ©

Just thinking of all growth opportunities that have irreversibly been lost the last 12 years, makes you want to cry.

Sir, the regulatory credit-risk aversion that is present in the current risk weighted capital requirements for bank started back in 1988 with Basel I, but it really took on huge force with Basel II of June 2004, when even the private sector was split up into different risk baskets.

The risk weighing allowed banks to leverage more with assets perceived, decreed or concocted as safe than with “risky” assets. And so bankers were able to realize their wet dreams of making their largest risk-adjusted returns on equity on the safe, which therefore allowed them to be able to abandon the “risky”

Now, 12 years later, we should cry for all those opportunities of SMEs and entrepreneurs gaining access to credit, and helping move our economies forward, that have irreversibly been lost. Damn the Basel Committee and its regulations! Now our banks do not finance the risky future but only refinance the safer past. Now we are sitting here waiting for the next safe-haven to become dangerously overpopulated.

But what makes me want to cry the most is that the regulatory blocking of initiatives that would be opening up new activities and job opportunities for our youth is not even been discussed.

And to top it up, had all the credit opportunities that would normally have been awarded been awarded, banks would not be any riskier, because lending to the “risky” is not the stuff major bank crises are made off. If you know how connect dots, try doing so between what banks were allowed to hold against little capital, because it was “safe”, and what caused the 2007-08 crisis.

Yes, short-term bank returns on equity, as a consequence of not allowing banks to leverage so much with “safe” assets would have suffered but, long-term, even banks stand to benefit from a strong economy.

Stephen Foley, writing about a conference at the Milken Institute tells of “concerns [about] the US public pension funds… in an era of weaker demand, anaemic business investment and low growth, yet the average fund is still forecasting a 7.6 per cent annual return on investment portfolios, basically the same returns as the past 25 years.” And, as if lack of expertise was the problem: “Vicki Fuller, chief investment officer of the New York State Common Retirement Fund, said public funds tended not to have the expertise to pick good private equity investments.” “Financial elite hum a sunny tune as signs of disruption gather” May 10.

A financial elite that does not understand the destructive distortion in the allocation of bank credit to the real economy the credit risk weighing produces, is sincerely not a financial elite to write home about.

Here a link to an aide memoire about the idiocies of current bank regulation

@PerKurowski ©

We are suffering from a well-disguised creative financial statism of monstrous proportions.

Sir, Dan McCrum writes: “it seems so inherently weird for about a third of debt issued by governments in the developed world to be bought and sold at negative yields” “Negative rates reverse assumptions about financial decisions” April 15.

Not weird at all: a) take away all central banks purchases of public debt with QEs, which helped to keep the saving glut intact or even increase it; b) get rid of regulations that assign the lowest risk weights and thereby the lowest capital requirements for banks to the borrowings of the sovereign monarch; c) stop what McRum mentions about “pension funds and insurers [having to] buy safe government debt irrespective of the price; and d) stop central banks from paying negative returns… and you would not see public debt bought and sold at negative rates.

What we are really suffering from is a well-disguised and utterly creative and non-transparent financial statism of montrous proportions.

The cost of all that is partly borne by savers and future pensioneers, but primarily by our children and grandchildren since the real economy will not grow as it could, consequence of all the credit opportunities denied “the risky” SMEs and entrepreneurs

@PerKurowski ©

Pension funds, widows and orphans have been told to keep out of what’s perceived safe, that’s now the banks’ domain.

Sir, Robin Wigglesworth writes about “an environment where many safer bonds still offer insultingly low rates” “Greed set to trump fear as high-yield bonds live up to their name” August 8.

Bank regulators, with their credit-risk-weighted capital requirements, allow banks to leverage their equity and the support received by deposit guarantees and similar, immensely, as long as they stick to lending to “The Safe”.

Consequentially the more regulators favor and therefore subsidize bank lending to “The Safe”, the lower will be the interest rates paid by “The Safe” and, of course, in relative terms the higher the rates “The Risky” need to pay.

Ergo… non-banks who have to evaluate the increased spreads between The Safe and The Risky, without counting with the regulatory bank-subsidies, are more tempted by, or are in more need of the higher rates paid by “The Risky”.

Pension funds, widows and orphans were the one investing in “The Safe” Now they have been told to get out of there… “That’s for the banks!”

The Risky, like the SMEs and the entrepreneurs they used to have access to the banks… now they are left out in the cold… desperately looking for some crowd-funding.

@PerKurowski

Banks were instructed to abandon risk and compete with pension funds, widows and orphans for “safe” sovereign bonds.

Sir I refer to FT Alphaville “This is nuts — all the eurozone bonds have gone” March 4.

Of course it is nuts. More than 10 years ago, in November 2004, before some egos got in my way, you published a letter in which I stated “bank supervisors in Basel are unwittingly controlling the capital flows in the world…how many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector”

And after the crisis left banks with less equity and the regulators with more requirements that has only gotten worse.

The truth is that banks were told to abandon what they usually did and compete with the most risk adverse for whatever little “safe” there was and those “safe” havens are, as a result, becoming more dangerously overcrowded by the day... and those though more risky much more productive bays are becoming less explored by the hour.

That banks are instructed to push out pension funds, widows and orphans from safe havens is absurd, and immoral.

Sir, I refer to Percival Stanion’s “When prospect of certain loss unleashes risk-seeking impulse”, February 19.

There are two major types of risk directions: that of loans to those perceived as risky, and that of excessive exposures to what is perceived as “absolutely safe”. Regulators have instructed banks, in no unclear terms, by means of portfolio invariant credit risk weighted equity requirements, to stay away from the first type, but they have not said a word about the second.

As a result, and most specially in these days of scarce bank equity, European banks are entering more and more into that terrain that already in some places signify at its best “locking in a loss at redemption”. In fact, with pre-announced inflation targets you do not even need negative rates for that.

Today Roula Khalaf gives a nice illustrating account on what is happening to Russia, by means of looking at Russian tourism in Switzerland, “A slippery slope for Switzerland’s Russian skier”. How sad that the Financial Times does not ask its journalists to look equally look at what is happening in Europe, by looking at where bank credits in Europe have been traveling ever since Basel II was introduced in June 2004. At this moment those credits are going into sovereigns squeezing out widows and orphans. Is that not an absurd and even immoral state of affairs?

PS. I have been lately been calling those negative rates as “pre-agreed minimum haircuts” because that is what they are… and so not only does Greece want a haircut… Germany and others are already giving de facto haircuts.

PS. Sir I have also asked you whether a pension fund would be authorized to accept such haircuts in the name of the beneficiaries… but I have not yet been given an answer.

Could a beneficiary sue a pension fund for blatant breach of trust if it buys a bond with negative interest?

Sir I refer to Ralph Atkins’ and Elaine Moore’s “Negative rates to hit financial system”, February 16.

I have a question: Could a beneficiary sue a pension fund for blatant breach of trust if it buys a bond with negative interest? I mean is that not something like agreeing to a sort of prepaid pre-accepted haircut with somebody else’s money?

If I managed a pension fund, I would sure send a letter to all those who are expecting my management to provide them with a decent retirement stating something like: 

“Warning, we must inform you that central banks and governments are creating dangerously strange market conditions for which we hope you will not hold us personally responsible… and, for the time being, forget about expecting something like an 8 per cent return... if you earn enough with us to pay our costs, consider yourself a winner”.

The future of current and future pensioners is being pickpocketed by distortive bank regulations.

Sir you discuss capping pension fees in “Plug the deficit on pension regulations” December 27.

In it you hold that “workers need to save more… but they also need to invest wisely”, that “Vigilant regulation is needed to make sure that unsuspecting savers do not end up being pickpocketed”, and that “Savers should be grateful if business ideas that depend on charging unreasonable high fees never see the light of day”.

And solomonically you end holding that “Regulators cannot ensure that every provider charges a fair price. But they should give consumers the means of looking after themselves.”

How good of you! But why do you not dare to care more about how the future of current and future pensioners, like that of so many young without job, is pickpocketed by distortive bank regulations? These certainly cause much more damage than some unreasonable high fees.

“Invest wisely?” In an economy in which the capital requirements for banks are based on perceived risks already previously cleared for? In an economy where banks are therefore investing on preferential leverage terms in what is perceived as “absolutely safe”? Where are then pension funds to go? To finance railroads in Argentina perhaps?

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.