2010.08.3102:41:00UTC+00RBA's Debelle: Important To Make Financial System As Robust As Possible

Risk assessment, or more precisely, mis-assessment has been one of the key elements of the financial crisis, Reserve Bank of Australia Assistant Governor Guy Debelle said on Tuesday. Risk was mis-assessed by financial institutions, risk managers, investors and regulators.

The future is uncertain, in the sense that it cannot be quantified. Stress testing and the assessment of uncertainty is still constrained by the difficult decision as to what is the relevant set of stresses that the framework should be subjected and what is the relevant history, said Debelle. "A healthy dose of judgement needs to be brought to bear on these decisions."

It is important to try to make the system as robust as possible to the inherent irreducible uncertainty, he added. One key element of this is restraining leverage, which can limit the number of illnesses that turn into fatalities. A system with less leverage is one obvious means of enhancing robustness, according to Debelle.

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