Myron Scholes Quotes

The fundamental problem with banks is what it's always been: they're in the business of banking, and banking, whether plain vanilla or incredibly sophisticated, is inherently risky.

Complexity and interconnectedness matter as much as size in assessing risk in banking.

I've been telling anyone willing to listen that banks have a tendency to sit on time bombs while convincing themselves that they are conservative and nonvolatile.

A financial institution has the task of taking risks, and if it's a well run institution - say, Goldman Sachs - it tries to cover the potential losses to itself, but only to itself.

Equity is the cushion that protects financial institutions from unexpected changes in the value of their assets. The greater the leverage, the smaller the losses required to wipe out a company's equity, leaving it without enough money to repay the people who hold its debt.

It's hard to tell which assets will be toxic. The best way to ensure that only shareholders and banks feel it is have adequate capital.

Bailing out every bank that fails makes the system riskier, not safer.

Investment banks manage to go bankrupt through their investment-banking activities, commercial banks manage to go bankrupt through their commercial-banking activities.

In the financial system we have today, with less risk concentrated in banks, the probability of systemic financial crises may be lower than in traditional bank-centered financial systems.

At the heart of banking is a suicidal strategy. Banks take money from the public or each other on call, skim it for their own reward and then lock the rest up in volatile, insecure and illiquid loans that at times they cannot redeem without public aid.

If nobody can sell mortgage-backed securities based on trillions of dollars of unpayable instruments, there's a lot less risk in the overall system.

Banks always want their capital requirements to be as low as possible, so they can take more risks, which can enable them to make more money – and reap bigger bonuses for executives.

Loss-absorbing capacity among banks is substantially higher as a result of both regulatory requirements and stress testing exercises.

I spent my whole career thinking about risk, markets, infrastructure, and regulation. I had seen the financial crisis unfold, and I had seen the credit derivatives market get operationally ahead of itself, which resulted in systemic risk counterparty exposures. I began to believe that distributed ledgers had the capability to tackle that problem.

Indeed, better risk management may be the only truly necessary element of success in banking.

Risk managers and investment bankers and actually, all kinds of investors took on more risk than they expected. So there was a failure of risk management. There was a failure to recognize how much risk there was in some of these securities that people bought.

The government-sponsored institution Fannie Mae, when I look at its risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup. But not to worry: their large staff of scientists deemed these events "unlikely."

I do believe that banks are special - they are very leveraged institutions by nature; therefore, it's even more critical to ensure that the governance and the process of running a banking company are well-organised, managed and regulated.

The very nature of finance is that it cannot be profitable unless it is significantly leveraged... and as long as there is debt, there can be failure and contagion.

It is no wonder that bank capital is regulated. When borrowing and lending is profitable, it is tempting for banks to scale up their operations and to borrow and lend too much in relation to their capital, in effect reducing the effectiveness of the potential capital cushion.

We should ban banks from risk-taking because society is going to pay the price.

Most of the time, your risk management works. With a systemic event such as the recent shocks following the collapse of Lehman Brothers, obviously the risk-management system of any one bank appears, after the fact, to be incomplete. We ended up where banks couldn't liquidate their risk, and the system tended to freeze up.

For years, critics of Fannie Mae have warned that it does not give them enough information to judge its risks.

What I think about derivatives is if every institution that owns or trades them is properly margined and marked to market, including end-users, including every institution, including sovereigns and multilateral institutions, then the system would be safe - if people were margined the way customers of investment banks are margined.

I'm afraid sometimes certain individual cases of defaults are unavoidable. What we should do is to step up monitoring, properly handle relevant matters, and ensure there is no regional and systemic financial risk.