March 22, 2016

There is risky bank lending and then there is "risky" bank lending

Martin Arnold and Laura Noonan quote Gonzalo Gortázar, chief executive at Spain’s Caixabank with “In a world of low or negative interest rates, that is a possible consequence. You could see banks taking more risk” “Europe bank chiefs fear risky lending from ultra-loose policy” March 22

Of course I cannot be absolutely sure but, when “banks taking more risk” is said, it most probably refers to larger exposures to something that because it is perceived, deemed or sold as safe, carries lower capital requirements.

What is perceived by regulators as risky, like loans to unrated corporations, SMEs or entrepreneurs, and which is risk weighted 100 percent or more, and so require banks to hold more capital, well that’s not the risks banks are taking, unfortunately for the economy.

It would be nice to see reporters digging up a little bit more about what risks is being referred to. In fact, I start any risk assessment by identifying what risk one cannot afford not to take... because that would be too risky.

PS. Another interesting detail is whether it is the ex-ante perceived risk or ex-post resulting risk that is being considered.

@PerKurowski ©