February 25, 2015

There are credits for building the future and credits for consuming the past. And these must live in harmony.

Sir, Martin Wolf writes “The world desperately needs new ways to manage its economy, ones that support demand without creating unmanageable rises in indebtedness” “How addiction to debt came even to China”, February 25.

Indeed, but to achieve that it is an absolute must to understand that, in order to harvest and consume you need to first finance the sowing.

Currently regulators, by just looking at credit risks, which obviously favors what is already harvested, have with their lower equity requirements, mindlessly tilted bank credit in favor of financing the consumption over the sowing.

Creditworthiness should not only be based on repayment, but should also consider what the credit is to be used for.

In fact, many decades ago bankers used to tell us: “Know your client - What is the credit for? - How do you intend to repay?”

Current regulations have bankers outsourcing the “know your client” to credit rating agencies and caring little about what the credit is for. Nothing good can come of that.

I prefer one and the same equity requirement against all bank assets so as not to distort the allocation. But, if I had to choose, then thinking of those who will come after us, I would allow banks to hold less equity against what builds the future then against what consumes the past.

That way banks would earn their higher risk adjusted returns on equity working for our children and grandchildren, instead of working for us.

But of course, there are also plenty of baby-boomers asking: “Why that? I need or want it now!… après moi le deluge