Do we need bankers, as in good loan officers, or bankers, as in creative financial engineers?
Sir, I refer to your “Europe’s banks are losing the global race for talent” February 25. In general terms, and most especially with “Banks, like the best football clubs, should nurture their young talent”, I agree completely. That said my concern with respect to all banks, not just European, is about what banks would benefit us the most.
For around 600 years banks allocated their credit to what bankers thought would produce the highest risk adjusted net profit margins, something which required them to consider interest rates and operation costs. In those days good loan officers were of utmost importance.
After the introduction of risk weighted bank capital requirements, banks now allocate their credit to what bankers think will produce them the highest risk adjusted net profit margins adjusted to capital requirements, something which now, besides interest rates and operation costs requires them to consider leverage possibilities. In this new kind of banking creative financial engineers have an important role to play.
I am convinced traditional banking not only satisfied much more efficiently the credit needs of our economies but was also much less dangerous in terms of financial stability than “modern” banking.
But Sir, you don’t have to take my non-PhD opinion on that. In his 2018 autobiography “Keeping at It” late Paul Volcker wrote: “Over time, the inherent problems with the risk weighted bank capital-based approach became apparent. The assets assigned the lowest risk, for which capital requirements were therefore low or nonexistent, were those that had the most political support: sovereign credits and home mortgages. Ironically, losses on those two types of assets would fuel the global crisis in 2008 and a subsequent European crisis in 2011.”
Yes, Europe and the world, of course needs a new generation of bankers, but before that, for our own good, let’s make sure they have the right type of banks to lead.
@PerKurowski
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