Tuesday, March 29, 2016
Mr Hiroshi Nakaso, Deputy Governor of the Bank of Japan gave on March 21, 2016 a speech titled “Challenges toward financial stability and the policy frontier – unconventional monetary policy, macro-prudence, and financial institutions’ low profitability”
In it he said: “Joseph Alois Schumpeter, in his seminal “The Theory of Economic Development” stresses the important role played by the “banker”, as well as that of the “entrepreneur”. The banker profits from her ability to identify those entrepreneurs who develop truly innovative undertakings that are high-quality startups, and from generating information that leads to improved corporate performance. Schumpeter expects that such profit motives of the banker backed up by her exceptional ability to pick winners would bring about a more efficient reallocation of risks in the macro economy and lead to an endogenous rise in the economic growth rate.
This role of the banker- promoting the creative destruction through financial intermediation – has not changed since the time of Schumpeter.”
You are so wrong Mr Nakaso! You and your colleagues have changed the role of the banker.
With your risk weighted capital requirements for banks, which allow banks to leverage more their equity with what is perceived safe than with what is perceived risky; and thereby be able to obtain higher expected risk-adjusted returns on equity when financing what’s “safe” than when financing what’s “risky”, have certainly changed the role of the banker.
Nowadays his role, as you and you colleagues have seen it fit, is simply to avoid taking credit risks.
If you do not believe me look at the following authorized bank equity leverages in Basel II. (The risk weights in Basel III remains the same)
When lending to prime sovereigns, the sky is the limit.
When lending to the AAArisktocracy 62.5 times to 1.
When financing residential housing 35.7 times to 1
And when lending to risky unrated SMEs and entreprenuers, only 12.5 times to 1
And that Mr Nakaso, is why banks do not any longer finance the riskier future, they just refinance the, for the very short time being, safer past.
The next generations will hold you and your colleagues accountable for this regulatory atrocity.