February 22, 2013

Stop the foolish and immoral flogging of “The Risky” bank borrowers

Sir, Alex Barker and Caroline Binham report on how “Brussels turns up pressure over Libor-rigging scandal”, February 22, They write “a bank implicated in all three investigations could, for example, face fines of up to 30 percent of revenues”.

Has the European Commission no idea of whom, at the end of the day, somehow somewhere, is going to have to pay these fines?

Just for a starter, depending on whether the borrowers are perceived as risky or not, since paying the fine will result in less bank capital, the guilty bank will have to shrink its lending between 10 and 50 times the amount of the fine. And of course the issuing of fresh bank capital that is so needed will be more expensive as a result of these fine-risks. And of course the margins charged by the guilty bank on its lending business will have to increase.

And those who will suffer the most, are the bank borrowers who because they are perceived as “risky”, by order of the bank regulators, currently generate higher capital requirements for banks, like small and medium businesses and entrepreneurs.

Fines and other sentences should be applied directly to the bankers responsible for misbehaviors, but, if they insist on the fines being paid by the banks, the least they should do is to require these to be paid, for example, through the issuance and delivery of new bank shares for the amount of the fine at market prices.

Please, we must stop this foolish and immoral flogging of “The Risky” bank borrowers, as if it were not already hard enough on them to be perceived as “risky” having to pay higher risk-premiums, getting smaller loans and often having to accept other harsh terms. When the going gets tough, that is when we most need “The Risky” to get going.

And please, bank regulator, wake up to the reality that “The Risky” has never ever been the root of your problems, that dubious honor belongs exclusively to the “Potemkin Infallible”