Bank regulations should be a prime issue discussed during UN’s Paris conference on climate change. Will it be?
Sir, I refer to FT’s Special Report “Managing Climate Change” November 27.
If a bank is allowed to hold less capital against Good assets than against Bad assets, then the bank will be able to earn a higher risk adjusted return on equity on The Good than on The Bad. And then banks will lend more, and on better terms, to The Good than to The Bad.
Currently bank regulators have defined The Good to be those whose perceived credit risks are lower than that of the Bad. That is dumb, serves no purpose and is unjust.
Dumb because banks, by mean of interest rates and size of exposures already clear for credit risks, and so perceived credit risk gets to be considered excessively, which is something that seriously distorts the allocation of bank credit.
Purposeless because perceived credit risk has nothing to do with the usefulness for the economy and the society of a bank credit being awarded.
Unjust, because by favoring more than ordinary the access to bank credit of those perceived as safe, impede those perceived as risky to have fair access to the opportunities that bank credit provides.
If I had the opportunity in Paris I would suggest that we urgently redefine The Good bank assets. The Good should be those that help us to achieve the two things we would most love for our banks to help us out with, namely the creation of the many new jobs we need, and to make our planet more sustainable.
Could that happen? I am not sure. That requires many to understand what the credit-risk capital requirements for banks have done to our real economies, and that is not a pretty sight bank regulators likes the world to see.
Sir, would it not be nice if suddenly banks earned higher risk adjusted returns on equity doing something we like them very much to do? Of course it would. Hey, we could perhaps even see some huge bank bonuses paid in a quite very different light.
@PerKurowski ©
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