July 23, 2013

Now if only regulators allowed banks to be banks again.

Sir, Patrick Jenkins writes about “a small manufacturing company… looking for £150,000 of working capital. It is traditionally the kind of need that might have been met by a bank loan. But, in the post-crisis world of bank belt-tightening, it is now the bread-and-butter of upstart peer-to-peer (P2P) lenders. “Why peer-to-peer lending remains inherently unsafe”, July 23.

No, this is not the result of a “post-crisis belt-tightening” but of pre-crisis bank regulations, Basel II, June 2004, which required banks to hold immensely much more capital (equity) when giving loans as that described, than when lending to the sovereign or the AAAristocracy.

And Jenkins correctly writes “Banks might have done themselves and the world a lot of damage in recent years, but they are still better judges of lending risk than the average investor”. Indeed they are, and they would be the best at handling such loans, if now regulators only allowed the banks to be banks again.