Wednesday, 11 February 2009

Banks must take risks

In my blog on the 17th October 2008 i wrote that in a free market banks have no choice but to take big risks in order to make big profits, so long as other banks are doing the same.

I said that any bank that failed to take that route, that opted for a more cautious approach would most likely get taken over as profits would fall in comparison with other risk taking banks, resulting in a lower share price and so on.

Today we have the breaking story that something similar thing did actually occur in HBOS. Mr Moor who was the head of regulatory risk at HBOS from 2002 to 2005 was allegedly sacked by the chief executive of the bank for predicting that the reckless lending of the banks would end in disaster and that a less riskier approach was prudent.

The lone voice of reason was shouted down in the scramble to grow assets at any cost.

In an unregulated free market economy banks could not risk being left behind so had to gamble, and anyone who suggested otherwise, well..

Check out the full story here.

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