Friday, December 5, 2014

Europe, America, you might use the average risk aversion of nannies, but, never ever, as the Basel Committee does, use a sum of these.

Let us suppose a perfect credit rating. 

And that perfect credit rating is then considered by the banks and the market in general, and cleared for by interest rates, the size of the exposure and other terms.

But when bank regulators (Basel Committee) ordered that perfectly perceived credit risk, to also be cleared for in the capital of banks, then they completely messed it up.

Because a perfectly perceived risk, when it is excessively considered, causes an imperfect reaction to it. 

Let me explain it in the following way: 

Figure out the average risk aversion of nannies when letting your kids out to play… that might not be the best risk aversion to use, it might be too high, but anyhow it is acceptable. 

But, never ever add one nanny’s risk aversion to that of other nannies, because then your kid will never ever be allowed to go out and play… 

And if your kids only stay “safe” at home, they will eat too many cookies and turn obese… like some of their nannies.

And that’s what we have now, banks staying home, playing it safe and turning obese by lending to “infallible sovereigns”, house financing and member of the AAAristocracy or the AAArisktocracy; while not going out to play, in order to develop muscles, for instance by lending to small businesses and entrepreneurs.

Our banks no longer finance the "risky" future they just refinance the "safer" past.

You can use their average risk aversion,
 but, for the sake of our kids (and our banks) please, never ever the sum of it