Capital buffers needed to combat price bubbles, says Jarrow

Banks should carry extra capital to combat distortive effects of price bubbles, says academic

Cash bubble
Bubble thinking: banks should set aside capital buffers

Banks should consider setting aside additional capital buffers to combat the distortive effects of asset price bubbles on standard measures of risk, research by Cornell academic Robert Jarrow suggests.

In a paper published this month in the Journal of Risk, Jarrow – who won Risk’s Lifetime Achievement award in 2009 partly in recognition of his work on liquidity risk and market bubbles – warns ignoring asset price bubbles will lead to firms underestimating their true value at risk, and thus hold

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