April 27, 2011

To achieve a sensible pricing of risk, you need to avoid any opaque risk discrimination

Sir Francesco Guerrera writes “In the post-crisis world, risk must be sensibly priced” April 26 and of course he is right, because it was not sensibly priced risk that created the current crisis.

It would seem though that Guerrera might not understood it all yet, because, as he discusses the need for margins to be put up by corporate counterparties when dealing in derivatives with the bank; and he accepts that “banks adjust the cost [of derivatives] based on the credit profile of the buyer”, he does not mention the certain risk that margin requirements, if applied in any discriminatory way, will make the price discovery of risk, much more opaque, and wrong.