RTTNews - When evaluating banks and their management, there is a need for greater focus on returns on assets rather than on equity, the Bank of England's Executive Director of financial stability, Andrew Haldane said.
According to the remarks of his speech at the 45th annual banking conference in Chicago on May 8, published in the BoE's Web site on July 1, Haldane said the pre-crisis great performance of the financial services sector was almost entirely due to luck than skill.
Good luck and good management need to be better distinguished, the central banker said.
He said return on equity, a measure of bank's skill in managing assets, can be increased by higher leverage. According to Haldane, leverage is gambler's luck.
He said during the golden era, competition simultaneously drove down returns on assets and drove up target returns on equity. Caught in this cross-fire, higher leverage became banks' only means of keeping up with the Jones's. Management resorted to the roulette wheel.
Moreover, he said there is a need to place much stricter system-wide limits on leverage. These limits should aim to prevent the South-Easterly migration by banks under competitive pressure.
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