For the health of our banks, much more important than more capital, is less capital distortion by the regulator

Sir, Tom Braithwaite writes that “Regulators will have to be watchful that banks do not dream up new risky products that evade high charges… but… safer businesses such as advisory work or retail brokerage are being preferred because they are ‘capital light’ and hence good for overall ROE”, “Quest for profit in high-capital world can make bank safer” February 19.

Is advisory work or retail brokerage what our banks should all be about now? What about their vital function of helping to allocate economic resources efficiently? Tom Braithwaite might have a job, for now, but what about those millions of unemployed counting on banks to finance those who could create jobs?

And Braithwaite ignores that dreaming up new risky functions to evade high charges and obtain high ROE has been made a competitive necessity, by the sheer fact that the regulators allow there to be some “capital light” pockets.

I have not read The Bankers New Clothes by Anat Admati and Martin Hellwig, yet, but if it holds that “Bank’s obsession with return on equity is at the root of the problem…this makes the whole system more fragile”, would that not precisely indicate the dangers of capital requirements which, quite arbitrarily, allow some bank bets to make a larger ROE than others? If a regulator I would for instance much prefer banks having diversified exposures to “The Risky” than having to trust the infallibility of some monumentally large exposures to “The Infallible”.

And, if that is not in the book, then I must say that Sir Mervyn King unfortunately still does not understand “what is wrong with banks and what needs to be done to make them safe”. Yes, more capital is needed, but that capital should primarily be required as a result of eliminating differences in capital requirements, and not feeding these.

“There is far more capital in the banking system than there was in 2007” it is written. That could indeed be true, I do not have the figures, but it could also be a very devious half-truth, if the increase in capital is just the result from banks exiting “capital heavy” in order to, quite dangerously, overpopulate some “capital light” pockets.