Friday, January 23, 2015
Jr. Credit Officer Martin: "Sir Bank President, do you not think that, no matter how safe it looks, this 100 million of exposure to Mr. Absolutely safe, must be a hundred times more risky for the bank, than all those half million exposures to the more risky, and from which we anyhow get much higher risk premiums?"
Bank President Wally: "Dear Martin, I know it sounds sort of crazy that the Basel Committee, in a portfolio invariant way, requires us to hold only a fraction of equity when lending to Mr. Absolutely safe, when compared to what we must have when lending to “The Risky”…. you might be right… but who are we to doubt those experts in the Basel Committee and the Financial Stability Board?
Besides, as your mentor and friend, I strongly suggest you keep your concerns hushed up. As you surely must know much of the returns to our shareholders, and the size of our bonuses, depend on those ultralow equity requirements allowed when doing “ultra-safe” business."