Thursday, September 27, 2012

The bank regulators are to blame for outlandish bankers' bonuses

Time ago, when banks were banks, a banker needed to be able to carefully analyze the credit risk of his client, and then offer a competitive rate so as not to lose the business. That lead to tight profit margins which needed also to be shared with shareholders, and so there was never really much room for big banker bonuses. 

But then came the regulators and decided that banker did not really have to lend to the “risky” any longer in order to make profits, because since they would be required to hold much less capital when lending to those officially perceived as “not-risky”, the return on equity when doing so, would shoot up, and, to top it up, with less capital, there was of course also less shareholders to have to share those higher margins with. 

And banker bonuses shoot up into the sky, especially for those banker-traders who had not the slightest idea of how to analyze credit risk. 

Do you find that hard to understand?... then let me phrase it as a question. 

Where do you think there is more room for huge banker bonuses, in the lending to the “risky” where banks need to hold 8 percent in capital, or in lending to the “absolutely not-risky” where banks are allowed to hold only 1.6 percent, or less, in capital?