October 01, 2012

A very dangerous “collective caution” has been institutionalized by bank regulators

Sir, John Authers writes that “Collective caution leaves European deal arena bereft” October 1. I wonder why it is so difficult for him to comprehend that this caution has been institutionalized in Europe (and America), by means of capital requirements for banks based on ex-ante perceived risk. 

Before, if something looked risky it was therefore most often avoided. Currently though, risk-aversion has shot up into the skies, since bankers are now paid by the regulators, with much higher returns on equity, as long as they go for the “absolutely not-risky”.