Where has all the risk gone?
A few points on risk and size by Golem XIV.
People always say Follow the Money. You might do better to Follow the Risk.
Risk is the pollution created by the process of making money. So where you find people making one you will surely find them hiding the other. You’ll find both at the banks.
Banks have managed to convince the regulatory authorities – their regulatory authorities, and I use the word ‘their’ advisedly – to convinced them to count the creation and storing of risk as part of the banks contribution to the nation’s GDP. I wrote about how our governments count risk creation and storage of as part of the bank’s GVA (Gross Value Added) in What the Banks Contribute to GDP. Our government’s reasoning is that risk is an unavoidable by-product of the financial industry so the industry should get credit for dealing with the stuff. But imagine counting the creation and storage of radioactive waste as part of the value added of the nuclear industry? Would it not seem perverse to celebrate increases in the amount of waste being stored and see it as evidence of what a wonderful industry it was, rather than ask why they produced so much in the first place? Would it not seem odd to talk glowingly (sorry) of the increases in radiation levels being stored, and reward the industry accordingly, rather than ask if there might not be a safer, less radioactive way of generating power? It seems to me this is the situation we are in with banking.
I wrote extensively about Banks and Risk in Propaganda Wars: Our Version – Risk Weighted Lies and its follow up Propaganda Wars: Our Version – Balance Sheet Instabilities. What I did not considered in those articles is that managing and hiding risk is as critical to shrinking a bank as it is to growing it.
Ever since we all woke up to banks being too big to fail, there has been talk of banks having to shrink or de-leverage their balance sheets. The question was, and is, how? Banks don’t like the idea of shrinking so by and larger those that weren’t forced to haven’t. They have chosen instead to shrink their risk not their size.
Full read here.