Saturday, October 10, 2015

One thing is a risk appraisal, a credit rating, and another, totally different, how much importance you give to it.

In January 2003, in a letter published in the Financial Times I wrote:

“Everyone knows that, sooner or later, the ratings issued by the credit agencies are just a new breed of systemic errors, about to be propagated at modern speeds. Friends, as it is, the world is tough enough.”

And so here they go again? When will they ever learn?

Do these regulators still not know that banks already look at credit ratings when they set their interest rates and decide on the size of their exposures? To also have credit ratings to set the capital requirements, give their risk appraisal a double weighting. And, a double weighting of even a perfect correct risk appraisal, produces the wrong result. One thing is a risk appraisal and another, totally different, how much importance you give to it.