Credit (from Charlie Brown)
(… from Charlie Brown I receive and publish …)
The general theory of finance explains that return is a positive function of risk:
R = f ( σ )
Risk is defined as the probability that the investment result is more or less different than the “expected” result. For this the risk is measured by the standard deviation , a non-directional measure.
There are therefore infinite coherent pairs of risks and returns:
(R 1 , σ 1 ), (R 2 , σ 2 ), (R 3 , σ 3 ) …
The “portfolio theory” tells us that the return of a specific investment is a function only of its systematic risk, that is, the extent to which the value of the investment varies, up or down, as general market conditions change. The specific risk, related to the individual characteristics of the investment, can be “diversified away” by putting more investments in the portfolio. If the Charlie Brown company does worse than the industry average, the Alberto Bagnai company will do better and the Goofynomics company will be without infamy and without praise (it will perform like the industry).
An Italian commercial bank has a large portfolio of clients operating in a given sector. It should therefore pricing the money given to every single customer primarily on the basis of the above considerations (i latches due prudential principals: you should not re invest in a gambling den, although this fact is often the case). And this is more or less what happened as long as the loans granted were packaged and sold en masse on the market with securitisations. The thing got out of hand and the mechanism broke after Lehman when it was "discovered" that it is not possible to magically "diversify away" even systematic risk (this was the false magic that in general sloth seemed to transform lousy portfolios with triple A rating – nothing new under the Minsky ).
Today, Italian banks must largely manage the risk internally . They are no longer concerned with total risk as much as with the so-called “ downside ” risk “ie the probability that the results of the individual investment diverge from those expected in a pejorative sense . The regulations are pushing more and more in this direction. The result is a general jamming of the trade credit process. An exasperated "risk aversion" prevails which, in addition to being unloaded on rates (outrageously high for smaller customers, not endowed with contractual strength and perceived as intrinsically risky), turns into a credit rationing. The banks try to offset the drop in turnover due to the trading on government bonds and the lever financial transactions (both things are frowned upon but tolerated by the governor Pilate).
And here ndi?
And therefore, this credit lockdown will not dissolve with more prudential regulation but only by altering the perception of the generalized risk of insolvency . That No on has been done through spontaneous exchange of "mood", but thanks to a massively expansionary economic policy and reflattiva which brings Italy out of its liquidity trap, while stimulating a healthy “ risk appetite” in the banking sector .
(… I declare the general discussion open, with an observation: it's Basel, beauty! …)
This is a machine translation of a post (in Italian) written by Alberto Bagnai and published on Goofynomics at the URL https://goofynomics.blogspot.com/2021/07/credito-da-charlie-brown.html on Tue, 06 Jul 2021 20:10:00 +0000. Some rights reserved under CC BY-NC-ND 3.0 license.