April 02, 2009

What we foremost need are capital requirements that cover for the risks that what is rated AAA is not really AAA.

Sir in Chris Giles’ “Harmony is main item on the agenda” April 2 mentions “Banks will be required to hold more capital in future and everyone agrees that capital requirements (for financial institutions) need to become stricter in good times to provide a greater cushion for downturns”. That is of course right yet it behoves all of us to remember that our current predicament had much less to do with “good times” and much more with having incurred in vanilla type plain old fashioned bad investments. In this respect the first thing to do, whether for good times or bad, is to place some capital requirements to cover for the risk that what is rated AAA is not AAA.