BLOOMBERG VIEW: BANKING NEEDS AN APPETITE FOR RISK

Douglas Flint, the chairman of HSBC Holdings, Europe's biggest bank by market value, says excessive regulation is making bankers too risk-averse for their own, and their clients', good. There's nothing new about bankers squirming under regulatory pressure, but Flint's warning carries extra heft because of who he is -- and because of an unpleasant corollary to his observation: Growing risks outside the banking system.

This is how Flint framed his argument:

"Greater focus on conduct and financial crime risks at all levels of the firm globally is clearly the right response to past shortcomings. There is, however, an observable and growing danger of disproportionate risk aversion creeping into decision-making in our businesses as individuals, facing uncertainty as to what may be criticized with hindsight and perceiving a zero tolerance of error, seek to protect themselves and the firm from future censure".

When Bob Diamond, then still chief executive officer of Barclays, told a U.K. parliamentary committee in January 2011 that it was time for bankers to stop apologizing -- only to be forced out the following year after his bank was ensnared in the LIBOR rate-fixing scandal -- he was only acting in character. Diamond was an investment banker, from the flashy, speculative part of the business.

Flint's background is as distinct from Diamond's as the difference in their names would imply if they were characters in a novel. The HSBC chairman is a thoughtful accountant, a respected authority on reporting standards who served as his bank's finance director for 15 years before stepping up to the chairmanship. He was largely responsible for steering HSBC through the financial crisis without it needing a government bailout. He isn't a racy risk-taker by any measure. Yet he, too, is weary of the increased oversight that's making people in his industry spend more time looking over their shoulders than facing clients.

According to Flint, "unwarranted risk aversion" is restricting less affluent clients' access to banking. The HSBC chairman has made this point before, when a demand from British regulators to better train financial advisers forced a number of U.K. banks, including his own, to deny advice to people with less than 50,000 pounds ($84,000) to invest. It's clear why Flint is frustrated: Banks have to keep their costs down, and while it's possible to save by cutting less profitable services, you cannot choose how much to spend on regulatory demands.

There are, according to Flint, too few weekends in the year for his staff to implement all the safeguards that are now required. Competition reviews, the wholesale market review, plus "four to five different versions of stress tests on top of resolution planning and just the business-as-usual regulatory reform, the aggregate strain is really getting quite marked," he explained on an earnings call yesterday.

Regulators have been ignoring bankers' calls for an end to post-crisis micro-management. If they hadn't, Diamond might still be at the helm of Barclays and some ugly behavior at banks wouldn't have been exposed. Flint's measured words, however, are worthy of more attention, if only because, as bankers shed risk, other institutions shoulder more of it. As Hyung Song Shin, chief economist of the Bank for International Settlements, recently put it, one way the world of finance has changed since the credit crisis is that protagonists other than banks are increasingly involved. "The risk-taking is happening through other market players," he said. "Long-term investors are also joining in."

Where banks can no longer service their riskier clients, pension funds, mutual funds and other financial services players are stepping in. Companies that used to play safe are getting into venture financing in bubbly places like the Silicon Valley and driving up valuations. Shadow banking is increasingly in the news. It makes no sense to turn the banking system into an island of risk aversion: Risk won't disappear, it will just flow to where there is less scrutiny.

BloombergView