June 18, 2016

Bank regulators minimizing the social impact of banks more than neutralize the social impact maximizing investors.

Sir, Stephen Foley and Adam Samson quote write about the efforts of Pope Francis to champion ‘impact’ investments, “FT Big Read. Investment: Blessed returns” June 17.

And Pope Francis is quoted with: “It is increasingly intolerable that financial markets are shaping the destiny of peoples rather than serving their needs”. I believe that having a tête-à-tête with the Basel Committee for Banking Supervision, could serve the Pope better than speaking with social impact investors.

The pillar of current regulations, the risk weighted capital requirements for banks, allow banks to earn higher risk adjusted returns on equity, for no other purpose than that to avoid ex ante perceived credit risks. That’s a very a poor objective for those who have a prime responsibility of allocating bank credit efficiently to the economy.

As a result those perceived safe, those who because of that already have plenty and cheaper access to bank credit, now find even more generous terms, while those perceived as risky, like SMEs and entrepreneurs, those who already had less and more expensive access to bank credit, have to fight much harsher conditions.

Clearly that regulation only guarantees to diminish the social impact of bank lending. It is the direct consequence of regulators regulating banks, without defining the purpose of these. That is an unpardonable irresponsibility of them!

Social impact based capital requirements for banks, which would allow banks to earn higher risk adjusted returns on equity when producing a high social impact, could sound as an attractive possibility, but is not free from dangers. To base capital requirements for banks on for instance the GIIN list of 559 metrics, those ranging from ‘greenhouse gas emissions avoided due to products sold’ to the number of suppliers who were minority/female/low income” could be gamed and also distort credit allocation in many other ways.

But, just to require the Basel Committee to answer a question of whether bank credit should not have a social impact, could open up a much-needed discussion on the need of eliminating the current regulatory discrimination based on perceived credit risk.

@PerKurowski ©