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August 30, 2013

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Bob Ford

Then Chris there is systemic risk aka Bank Herstadt 1974 and the danger that someone going under will bring others in the market down too

Iang

The ultimate answer to the risk problem, for business, for banking and including the above examples, is bankruptcy. It is for this reason that banking should be a strongly competitive field, so that the industry can pick up the occasional failure, without Bob's systemic risk kicking in to effect the economy.

But in recent times, regulators have been convinced to shy away from bankruptcy. In a post-Lehman Brothers / Arthur Anderson world, we end up with TBTF and its newer cousin, TBTJ.

Hence, there is also regulatory risk -- the risk that the regulators accede to short term thinking and push the levers too far one way or another. That then causes the banks as a group to become unsustainable...

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