September 30, 2015

Jonathan Hill: In order to lower the capital requirements for banks, why must credits be securitized?

Sir, I refer to Jim Brunsden’s and Alex Barker’s “Why Hill is no markets union swashbuckler” September 30.

In it they write: “Europe’s companies remain overwhelmingly reliant on bank funding, which is problematic when lenders are scaling back risk-taking post-crisis. The remedy is promoting access to other sources, notably through selling shares and bonds. Here there is room for growth”.

Not exactly, banks are not “scaling back risk-taking post crisis” they are scaling back on capital requirements based on perceived risks... c'est pas la même chose.

They also write: “The remedy is promoting access to other sources, notably through selling shares and bonds” and Jonathan Hill in his “A stronger capital markets union for Europe” suggests: “To help free up banks’ balance sheets, making it easier for them to increase lending, I am proposing a new EU framework, with lower capital requirements, to encourage simple, transparent and standardized securitization”.

And I must ask Hill: Are not direct bank loans to “risky” SMEs and entrepreneurs simple and transparent enough? Does not securitization increase the complexity and thereby reduce transparency? Does securitization mean the borrowers benefit from better terms or that securitizers obtain better profit margins?

Why does Hill not propose instead to lower the capital requirements for the banks when lending to those who, precisely because they are ex ante perceived as risky, have never caused a major bank crisis?

Could it be because Jonathan Hill believes that securitization magically makes all more secure, or is it that he does not want be blamed by colleagues for spilling the beans on the greatest regulatory absurdity of all times… the portfolio invariant credit risk weighted capital requirements for banks.

That absurdity on which FT having kept so much mum on, also must be praying fervently disappears unnoticed.