Friday, January 08, 2010

Banking Risk

Another look at the BIS concerns in the FT. This highlights the dilemma for the authorities and the change in risk appetite that has taken place.

Central banks want private bankers to take more risk. They want them to lend, even if credit demand is weak. More generally, they want to see funds flow out of cash and into the real economy. That, after all, is the point of near-zero interest rate policies and quantitative easing. The result has been a colossal and lucrative carry trade, with both welcome and unwanted consequences.

It is a good point. What could be more risky than lending to a small company? What is a more complex and opaque asset that a small business loan? By contrast, government bonds, while at risk from 1994-style tightening, look relatively safe. In addition, if bond prices collapse, the subsequent losses can be blamed on irresponsible government fiscal policy.

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