Chapter 12

Risk Management, Basel Accords, and Ratings

Let no loans be made that are not secured beyond a reasonable contingency. Do nothing to foster and encourage speculation. Give facilities only to legitimate and prudent transactions. Make your discounts on as short a time as the business of your customers will permit, and insist upon the payment of all paper at maturity, no matter whether you need the money or not. Never renew a note or bill merely because you may not know where to place the money with equal advantage if the paper is not paid. In no other way can you properly control your discount line, or make it at all times reliable . . . . Pursue a straightforward, upright, legitimate banking business. Never be tempted by the prospect of large returns to do anything but what may be properly done . . . . “Splendid Financiers” in banking are generally either humbugs or rascals.

—Hugh Maculloch, U.S. Comptroller of the Currency, 1863

Risk management is not merely about reducing risks (although that is in many cases a necessity), but essentially about taking risks in an intelligent manner. Banking can be no more riskless than life itself.

—Eddie Cade1

More and more the bank is a “risk machine.” It takes risks, it transforms them, and it embeds them in banking products and services . . . . They take risks more consciously, they anticipate adverse changes, they protect themselves from unexpected events, and they gain the expertise to price risks. . . .

—Joel Bessis2

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