Robert Jenkins, a member of the Bank of England’s interim Financial Policy Committee, said lenders shouldn’t use return on equity as a profitability target as it undermines financial stability.
“ROE is the wrong target,” he said at a conference in Paris today. “Over the last 10 to 15 years it has helped to make many bankers rich and loyal shareholders poor. Moreover it prompts banks to fight to keep loss absorbing capital low.”
“This makes their enterprises vulnerable and our financial system fragile,” Jenkins said. “As the key driver of bank behavior it has to go. If it does not, you can expect more collateral damage in the future.”