February 21, 2015

Our risk with banks has nothing to do with risks of their assets, and all with how banks manage risks of their assets

Sir, Tim Harford writes: “It’s particularly easy to fool ourselves when we already think we have the answer”, “Take a guess at JFK’s age in 1963” February 21.

Indeed, but it is even worse when we think we have the answer, but we are answering the wrong question.

Look for instance at what inspired bank regulators to create the pillar of current bank regulations; the risk-weighted equity requirements for banks: “more-risk-of the bank assets-more-bank equity and less-risk-less-equity” does it not sound so logical, does it not sound so right?

Yet the problem was regulators never posed themselves the right question. What they should have asked is: “What is the risk bankers will either not perceive the risks with bank assets or manage these correctly?” which is something that has clearly little to do with the risks of bank assets.

Look for instance at Martin Wolf. In July 2012 he wrote: “As Per Kurowski, a former executive director of the World Bank, reminds me regularly, crises occur when what was thought to be low risk turns out to be very high risk." And yet Wolf is incapable to take it from there, so as to accept that perhaps current bank regulations, with respect to perceived credit risk, are 180 degrees off target