Inglorious regulators! Getting to know them seems more important for banks than getting to know the customer.

Sir I refer to Frances Coppola’s “The golden age of banking was not always glorious”, June 25.

Coppola writes: “The assumption is that “getting to know the customers” was the touchstone of the industry before the deregulation that followed the Big Bang in 1986. If we could only return to the way things were done in the 1950s, we would have neither the excessive lending of the mid-2000s nor the starvation diet that has stifled businesses since. Lenders would act responsibly because their staff know and care for their customers… The truth, of course, is different. Banks have always acted irresponsibly at times”.

Not really. The fact is that in the 1950s, and really not until the 1990s, were banks required to have different amounts of equity for different assets. When that was introduced, especially with Basel II in 2004, it became more important for the banks’ risk adjusted returns on equity, to minimize equity requirement, than to maximize the getting-to-know-the-customers. Then bankers who used to argue the risk of borrowers, in order to charge higher premiums, argued their safety, in order to hold less equity against these. 

“Deregulation? Hah! Those regulations, by which inglorious regulators are re-clearing for the credit-risk already cleared for, are the direct cause of “the excessive lending of the mid-2000s [and] the starvation diet that has stifled businesses since.” Just wait until the young begin to understand what these regulations did and do to their perspectives of finding jobs. 

And Coppola tries to back up his argument by asking: “remember the 60 or so small lenders bailed out by the Bank of England in 1973?”. That is not applicable. That crisis resulted from excessive lending exposure to properties, which prices fell, and had very little to do with knowing your clients. By the way, had the current capital requirements been in effect in 1973, the final invoice to BoE for the bailout would have been much much higher.

PS. "Big Bang" In 1999 in a Op-Ed in I wrote: “The possible Big Bang that scares me the most is the one that could happen the day those genius bank regulators in Basel, playing Gods, manage to introduce a systemic error in the financial system, which will cause the collapse of our banks”