On risk from an economist's perspective

As you know, a while ago, I decided to try my hand at writing short notes, aphorisms, and poems. It's Friday, and time for a now note.

This short note was inspired by an interview with the chief economist at a major financial institution a while ago. He/she stated, without a doubt, that lower interest rates increase risk in the banking system. But, logically, that cannot be true. Banks do not have to take on greater risk simply because interest rates are low. So, here's a note on the matter:

On risk from an economist's perspective: From a linear thinking perspective, we might argue that lower rates lead to higher risk in banks. But just because rates are lower and may encourage a higher risk appetite, it does not automatically mean there will be higher risk in the banking system. This is too much of a simplification. Rather, individuals make decisions based on their individual risk aversion and the risk levels set by the institution. To be very clear, organizations do not behave, people do. Individuals in banks do not have to take greater risks because rates are low for natural reasons (Nota bene, owners' demands on EBITA margin is not a natural reason, nor is competitiveness).

This inability to sort out cause and effect, and untangle levels in a system (such as the organization and individual) and what goes on at different levels - even from individuals we may deem experts in a field - has always astounded me. Please, let us all try an do a little better.