July 09, 2016

Bank regulators, and FT, should learn backgammon, in order to understand what risk we cannot afford not to take

Sir, Anita Sethi “rolls the dice” and DBC Pierre says about Backgammon: “It’s about defence and offence…it reflects life. How and when to play it safe and how and when to take a gamble – we have to do both things to live well”, “FT Masterclass backgammon… with DBC Pierre” July 9.

Of course! In all risk management the most important question for me is: what risks can we not afford not to take?

As an Executive Director of the World Bank, in 2003, sensing what bank regulators were up to in a formal statement I held: “In Basel’s drive to impose more supervision and reduce vulnerabilities, there is a clear need for an external observer of stature to assure that there is an adequate equilibrium between risk-avoidance and the risk-taking needed to sustain growth”

But no, all to no avail, regulators did not care one iota about whether banks allocated credit efficiently to the real economy, only about banks not taking risks. And, to top it up, while seeing to the latter, they completely ignored that what is risky for the bank system is not what is perceived as risky, but what is perceived as safe, since that is the only type of assets with which banks build up dangerous excessive exposures.

But if regulators could therefore benefit from taking up backgammon to learn more about risks and risk-taking, so would FT. By how FT has avoided my arguments on this issue in thousands of letters I can only suspect Sir that you all there perfectly agree with regulators’ more ex ante perceived risk-more capital, less risk-less capital.

@PerKurowski ©