McEldowney, John F. --- "Managing Financial Risk: The Precautionary Principle and Protecting the Public Interest in the UK" [2011] ELECD 510; in LaBrosse, Raymond John; Olivares-Caminal, Rodrigo; Singh, Dalvinder (eds), "Managing Risk in the Financial System" (Edward Elgar Publishing, 2011)

Book Title: Managing Risk in the Financial System

Editor(s): LaBrosse, Raymond John; Olivares-Caminal, Rodrigo; Singh, Dalvinder

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9780857933812

Section: Chapter 25

Section Title: Managing Financial Risk: The Precautionary Principle and Protecting the Public Interest in the UK

Author(s): McEldowney, John F.

Number of pages: 24

Extract:

25. Managing financial risk: the
precautionary principle and
protecting the public interest in the
UK
John F. McEldowney

. . . [T]he scarcity of money is not always confined to improvident spendthrifts.
It is sometimes general through a whole mercantile town and country in its
neighbourhood. Over-trading is the common cause of it. Sober men, whose
projects have been disproportioned to their capitals, are likely to have neither
wherewithal to buy money, nor credit to borrow it, as prodigals, whose expense
has been disproportioned to their revenue.
Adam Smith, The Wealth of Nations (1776), p. 348.



25.1. INTRODUCTION

Financial risk management1 has received a bad reputation through the
failures of banks2 resulting in the financial crisis of the past years. As
profits increased aided by large borrowing and by `light-touch regula-
tion',3 financial institutions over-exaggerated the margins of safety and
the result was a financial crisis. The Economist concluded4 that overall
in many countries, including the UK and the US, the more that risk was
calculated and mathematically calibrated the greater the opportunity
arose for debt to be turned into securities, sold and held in trading books
with lower capital charges than regular loans. The financial institutions'
internal assessment was over-relied upon as were levels of self-regulation;
with the benefit of hindsight, this seems reckless. The result has been to
cast doubt on the capacity of financial regulators to regulate complex and
very technical markets and to require ever more government intervention
to prop up ...