Friday, January 29, 2016

Credit ratings do not reflect timely possible severe drops in commodity prices or volatile monetary policies

What is happening with commodities, like oil, and with emerging countries should open the eyes of bank regulators… but probably it won’t. 

Our bank nannies based their requirements of that capital that is to cover for unexpected losses on what they perceived as the one and only risk, namely the ex ante perceived expected credit risk… in much as it was reflected in the credit ratings. 

And the credit rating agencies rate the companies based on what they currently see. 

Where did the credit ratings reflect the possibility of a dramatic drop in the price of oil before it happened? Nowhere! 

Where do credit ratings consider the consequences, like for emerging markets, of shocking volatile monetary policies before they hit the market? Nowhere! 

And so now there is a lot of downgrading going on, and as a result lots of new capital is being required of banks, something that only accentuates the general downturn. 

The truth is that banks should already have had the capital to cover for unexpected losses, when they placed the assets on their balance sheets.