Consider taking on this challenge: Determine the correct level of risk for major international banks. Find the level that reduces the chances of a future international banking crisis while not suppressing lending activity such that it hampers economic growth.
This is the challenge currently being addressed by the Basel Committee for Banking Supervision. What is the committee learning? Risk is like pornography – difficult to describe precisely by you know it when you see it.
They are also encountering the reality that appropriate risk thresholds are situational – they vary based in nearly infinite variables.
It is easy for a politician to pontificate about the need for restrictions on “reckless” risk-taking. But determining what is reckless is no easy matter. Clearly some aggressive risks taken in the last decade have worked out well for all involved. And some did not turn out well at all.
It is easy to regulate risk excessively. Finding the right balance point requires an artful approach.
I say, “Tread lightly.” Ultimately, market incentives are a better way to calibrate risk than regulation. This does not mean regulations do not have their place. They do. But they need to be like the lines in which the game is played as opposed to the referees who critique each play
