June 11, 2009

Please, regulators, more humility.

Sir Emil Henry could not be more right when begging everyone to be very careful on the issue of whether and how a systemic risk regulator SSR could monitor financial institutions, “Daunting decisions on a new risk regulator”, June 11.

The truth is that regulating for systemic risk could be the most dangerous way of creating systemic risk. To understand the above suffices to look at the minimum capital requirements for banks concocted by the Basel Committee and that amount to a direct arbitrary intervention in the markets risk allocation mechanism and that can be shown having been the number one driver of the current crisis.

In “Against the Gods Peter L. Bernstein (1996) writes that the boundary between the modern times and the past is the mastery of risk, since for those who believe that was in God’s hands, risk management, probability, and statistics, must have seemed quite irrelevant. Today, when seeing so much risk managing, I cannot but speculate on whether we are not leaving out God’s hand, just a little bit too much.