March 18, 2015

The regulation of the finance industry might need more male skills.

Sir, John Kay referring to linkages between “testosterone and risk-taking” writes “We might have better banks if there was rather less male risk-taking and more female regulating and organizing”, “The finance industry needs more female skill” March 18.

If we in a game of roulette bet one dollar on either a safe color or a risky number, we are talking about exactly the same expected financial results, in this case a loss because of the zero the house reserves to itself. But, from that testosterone risk taking point of view are they really similar bets?

Currently we have bank regulations which, even though all major bank crisis have resulted from excessive betting on what was ex ante perceived as safe but that ex post turned out to be risky, allow banks to leverage much more their equity with what is perceived safe.

Since for instance they give a risk weight of only 20% to an AAA rated private borrower but a 100% risk-weight to an unrated borrower, the regulator is indicating, in roulette terms, that betting one dollar on the safe color, gives you five times the expected risk adjusted return than betting that same dollar on a risky number.

And all that while the real economy needs banks to give fair access to bank credit to “risky” numbers, the SMEs and entrepreneurs.

So, since regulators seem to have been blinded by some excessive misguided risk-aversion, what might most be needed, is instead more male risk-taking among regulators.