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The Inter-Temporal Nature of Risk

Author(s): Charles Goodhart , London School of Economics

Date published: Oct 2001

2001 Marjolin Lecture was delivered by Professor Charles Goodhart, London School of Economics, on "The Inter-Temporal Nature of Risk". Looking at a time perspective Professor Goodhart argued that risk must be understood in the context of a shifting and unpredictable world. Credit risk of financial institutions and the ned for provisioning for bad debts are affected by largely unpredictable business cycles. Indeed the term "cycle" may be a misnomer. Technology has an important impact on trends in productivity, asset price movements and economic activity. It is, however, very difficult for private market participants and for financial regulators to establish at which stage in the so-called cycle they are and when the next recession will come. Historically, there is very little sign of any constant regularity, or periodicity, in the onset of recessions. It is equally difficult for regulators or anyone else to determine quantitatively the extent of asset price misalignment. Hence, regulators should - in spite of these macro-economic measurement problems - try to develop a system with counter-cyclical movements in the regulatory variables such as collateral requirements, loan to value ratios and minimum capital requirements.

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