Europe and US, care less about how your banks are doing, and more about how these can help your economies do better.

Sir, I refer to Martin Arnold’s “Top European bankers warn of US threat to their future” and 

Frédéric Oudéa's “Europe needs homegrown bulge bracket banks” October 12.

Arnold writes: “The comments by two of Europe’s most senior bankers underline the growing angst in the industry about its performance and prospects. European banks are cutting thousands of jobs, selling billions of euros of assets and repairing balance sheets — while US rivals are expanding and growing stronger.” And Oudea concludes: “Europe also needs a few large players with strong capabilities on financial markets”.

In essence that means a call for bank regulations to be relaxed in order to make some banks stronger and bigger. There is nothing bad with that, at least not with the “stronger” part. But that is not the main priority.

At this moment, both Europe and US, as well as other, need to cast away their concerns about how banks as an industry is performing, and think much more about how banks can best serve the rest of the economy. And if banks were able to do so, that would also serve their own best long term interests.

That should begin with throwing out the risk weighted capital requirements that doubles the sensitivity to credit risk perceptions, and thereby distorts the allocation of bank credit to the real economy.

I have no idea where this notion of banks being able to survive splendidly, independently of the state of the overall economy was born. It is not something new, in 1997, having had my first brief encounters with the risk-weighted capital requirements for banks that originated in Basel, I wrote the following in an Op-Ed:

“If we insist in maintaining a firm defeatist attitude which definitely does not represent a vision of growth for the future, we will most likely end up with the most reserved and solid banking sector in the world, adequately dressed in very conservative business suits, presiding over the funeral of the economy. I would much prefer their putting on some blue jeans and trying to get the economy moving.”

@PerKurowski ©  J