March 31, 2015

Europe is a continent enfeebled by an economic crisis resulting from enfeebling bank regulations.

Sir, Tony Barber writes: “A continent enfeebled by economic crisis” March 31. I have a question to him (and you).

What does Barber think would happen with his retirement account if, since he began to save, he would have paid his investment manager much higher commissions on returns produced by safe investments than on returns produced by riskier investments. Would his investment manager not have played it overly safe for him?

But, on a societal level, by means of those credit-risk weighted equity requirements which allow banks to earn much higher risk adjusted returns on their equity when lending to something “safe”, than when lending to something “risky”, that is precisely how current regulators have instructed our banks to act.

Whether we like it or not, banks have a very important role to play as investment managers for our economies. And the reason we taxpayers implicitly agree to support banks is not for them to avoid risks but to, with reasoned audacity, take intelligent risks on our behalf.

We need our banks to act much more like aggressive hedge fund in which the manager, the bank, takes a great commission, but also produces great results for us the investors, and for our economies.

Barber quotes Frederick the Great with “Diplomacy without arms is like music without instruments”. Indeed, but banking without risk-taking can only, in the best of cases, result in paying out some lousy annuities to those with very short life expectancy.

Europe (and other) has been enfeebled by risk-adverse bank regulations and, amazingly, this seems to be a non-issue for most of you at the Financial Times.