Why Banks may have to alter risk mindset?

THE Greenspan Federal Reserve never cut the funds rate by more than 0.5 percentage point at any one time.

The Bernanke Fed has done so twice in two months. Sharp reductions in the funds rate have been supplemented with numerous other initiatives.

Even so, we believe Fed officials have failed to prevent a recession. Their objective is now to avert a long and deep recession by limiting the fallout in financial markets. On that basis, we expect them to succeed eventually.

This crisis may herald broader shifts. A key element behind the crisis was a very low pricing of risk in financial markets in the United States. Indeed, in general, these markets over the past couple of decades have tended to require progressively lower returns on capital for a given level of risk.

This crisis, depending on the final legislative response and shifts in attitudes regarding banks’ risk-taking, could mark the end of this trend.

In this sense, the current crisis could indeed be ‘wrenching’.

GERALD CHAN
COUNTRY HEAD, SINGAPORE
UBS

Source : Sunday Times - 28 Apr 2008