ABSTRACT
Risk arises primarily from two essential, and interrelated, factors: lack of information and the passage of time. With more time available, one can garner more information, for example from repeated experiments, and so risks would decline. With more information available, the future should become less unpredictable. However, what we want to concentrate on today is some aspects of the inter-temporal element of risk, rather than that which arises from lack of information. As Andrew Crockett, the General Manager of the BIS, stated in a speech at Basel last year (21 September 2000) (and previously in his keynote speech at the last Colloquium in Vienna, April 2000), that
we think of risk evolving through time. The received wisdom is that risk increases in recessions and falls in booms. In contrast, it may be more helpful to think of risk as increasing during upswings, as financial imbalances build up, and materialising in recessions. The length of the horizon here is crucial.1
Even if outcomes did follow policy decisions almost immediately, risks would, of course, still occur, arising for example from lack of knowledge, failure to appreciate the context, principal/agent problems, and perhaps from instantaneously occurring shocks of one kind or another. But it should be much easier to hold decision-makers accountable for their decisions, because the outcome would become apparent while they were, by definition, still on the watch (and before conditions could, perhaps, change that much – though the world can change in a flash, as it did on the morning of Tuesday, 11 September).
