Saturday, June 20, 2015
REALLY UNEXPECTED? THINK IT THROUGH?
Bank capital is to be held against unexpected losses because the expected losses derived from the perceived risks are already cleared for by smaller exposures and higher risk premiums,
The Basel Committee for banking supervision considered the dangerous looking forest had the greatest potential of the unexpected...
and therefore decided to require banks to hold the greatest capital when entering the dark scary forest (with its expected risks) than when entering that beautiful field (with its little expected risks).
Smart or extremely dumb?
Extremely dumb no doubt: That's why banks loaded up on what was perceived as safe, like AAA rated securities, like loans to Spanish real estate, like loans to the government of Greece... and do not give loans to those "risky" SMEs and entrepreneurs... who can help or economies to move forward, in order not to stall and not to fall.