Credit comes from the Latin root credo; to trust or to believe in.
In this chapter we will run through the accumulation of all of the flaws of the current risk measurement regimes which we have seen in earlier chapters and persuasively demonstrate that something must really change if we are to restore trust in the credit markets.
- Regulatory capital requirements are currently based on predictions of future price and loss distributions, which promotes cyclicality and optimisation based on those predictions.
- Optimisation of return on capital under this regime naturally increases leverage.
- This increase in leverage supports the creation of Minsky moments and Frederic Mishkin’s credit boom bubbles ...