August 23, 2013

All dollars paid in interests, should be worth the same when accessing bank credit.

Sir, Frank Keating, President and Chief Executive of the American Bankers Association, writes in response to Thomas Hoenig’s “Safe banks need not mean economic growth” of August 20, that “There is such thing as having too much capital”, August 23.

Keating argues, correctly, that “When regulators set rules, they should be surprised that banks naturally adjust to the incentives created” and also, equally correct, that “too often banks get blamed for making rational decisions based on the rules that have been set by their regulators”.

But what I do not agree with is when Keating sort of implies the debate on capital requirements should be among “the banking industry and regulators”. Banking is much too important for that.

Right now, those perceived as “risky” have much less opportunity to deliver a good return on equity to the banks, only because their borrowings give way to much higher capital requirements for the banks than what the borrowings of the AAAristocracy does.

And that means that a dollar paid by a “The Risky” medium or small businesses, entrepreneur or start-up, is worth less than the dollar of interest paid by one of “The Infallible”. And, sincerely, that so distortive regulatory discrimination, puts the real economy on track of having to regress, perhaps to even what it was in the times of black and white television.

The current huge needs of bank capital, which have resulted exclusively from the fact that so little capital was required from the banks on exposures considered as “absolutely safe”, is indeed a very urgent matter for all, banks, regulators, depositors and borrowers. But, instead of wasting so much time negotiating how much that capital increase should be, we should all be thinking about how to stimulate the mother of all bank capital increases, since the real economy, upon which the safety of the banks really depends in the long run, surely needs it.