October 03, 2015

Bank fines should be paid with bank equity, not with cash, unless we are masochists and want to be cruel to the economy.

Increasing the capital requirements for banks in the midst of a slow economy, while at the same time eroding bank capital with fines, is sheer economic cruelty… pure masochism. And especially so against those who for which cruel regulators decided, for no other reason that they think that to be a great idea to keep banks safe, that banks need to hold especially much capital when lending to them, like the SMEs and the entrepreneurs.

Sir, with respect to the reimbursement of claims for mis-sold insurance, you write that “As of this year, banks have already paid out about £20bn” and at long last take notice of that “The consequent erosion of banking equity can hinder credit provision in ways that damage the economy as much as the stimulus has helped” “UK banking’s sorry tale draws slowly to a close” October 3.

At long last FT! £20bn times a prudent level of 12 to 1 leverage gives you £240bn less lending capacity… at current imprudent sort of 30 to 1 leverage that would signify £600bn less lending capacity.

I hold “At long last FT!” because I have written you several letters on this problem but that, as usual, for your own internal reasons decided to ignore.

But I repeat. We must find a new way of imposing fines on banks. I have suggested that instead of cash banks pay in new shares issued at current market value. These shares if paid to the State could be non-voting and if paid to persons, like in this case, could include preferred dividends for some years.

PS. Having those mistreated by banks become their shareholders, seems like a innovative way of educating banks  J 

PS. Allowing authorities decide at each moment in what proportion of cash or equity these fines should be paid, would give them a new countercyclical tool  J

PS. The payment in bank shares should apply, of course, to all legal fees too J

PS. How come so many that loudly complain about government austerity loudly support bank credit austerity… do they all carry the virus of statism in their hearts? L