Monday, September 28, 2015
I quote from a recent speech by Ms Sabine Lautenschläger, Member of the Executive Board of the European Central Bank and Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism given September 28, 2015, titled Reintegrating the banking sector into society – earning and re-establishing trust
"Ladies and Gentlemen, esteemed audience,
How can bankers regain the trust that was lost during the crisis?
How can the banking sector be reintegrated into society?
There is no doubt that banks, bankers and the whole industry are experiencing one of the worst crises of confidence ever. The turmoil of 2008 and 2009 played a major role in this loss of public trust, but the problem did not end after the most acute phase of the crisis. Even seven years later, confidence in the banking sector is still very low.
Numerous scandals, like the manipulation of LIBOR rates…have reinforced the perception that wrongdoing is widespread in the banking sector.
But mistrust is not only confined to banks themselves. Investors and clients also have less confidence in the correct functioning of the banking sector and in the ability of supervisors and regulators to prevent excessive risk-taking.
We should worry about this loss of trust in the banking sector:
It impairs the proper functioning of banks to reallocate resources.
It hampers growth.
It leads to instability and costly crises.
But how can trust in the banking sector be restored? Who are the key players in this process? Is it enough to reform the regulatory and supervisory framework, as we have done in recent years?
But are the efforts of regulators and supervisors enough? Can trust be rebuilt simply by having better and more credible rules?
No! Rebuilding trust in the banking sector requires the active engagement of bankers and their stakeholders. Regulatory and supervisory reforms are necessary, but not sufficient to restore people’s trust in banks.
My view is that, while regulatory reform and supervisory action were certainly necessary to lay the foundations on which banks can restore trust, regulators and supervisors are not the key players in this process."
Bank regulators told banks: “We allow you to hold much less capital against assets perceived as safe than against assets perceived as risky, so that you can earn much higher risk adjusted returns on equity when lending to the safe than when lending to the risky.
That’s it! Just avoid the credit risks and you earn more, not a word about a purpose for banks, like helping to generate jobs for the young or making the planet more sustainable. Anyone regulating without defining the purpose of what he is regulating is as loony as they come.
And to top it up, the regulators assigned a risk weight of zero percent to the sovereigns (governments) and of 100 percent to the citizens and private sectors on which that sovereign depends. Which means they believe government bureaucrats can use bank credit more efficiently than SMEs and entrepreneurs.
And of course those regulations distort completely the allocation of bank credit to the real economy and, by diminishing the opportunities of the risky to gain access to bank credit, increases inequalities.
The manipulation of Libor rates is pure chicken shit when compared to the manipulation of the credit markets done by regulators with their credit risk weighing.
And here many years after it was clearly seen that the regulators efforts to prevent excessive risk taking only produced excessive risk taking in what was perceived as safe, here they are still talking about the need of “the ability of supervisors and regulators to prevent excessive risk-taking”. Without their regulations banks would have never ever been able to leverage as much as they did.
So forget it, I at least trust banks and bankers much more than their current regulators.