Introduction

A K M Kamrul Hasan () and Yasushi Suzuki
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A K M Kamrul Hasan: Ritsumeikan Asia Pacific University

Chapter Chapter 1 in Implementation of Basel Accords in Bangladesh, 2021, pp 1-12 from Springer

Abstract: Abstract The classical definition of ‘risk’ and ‘uncertainty’ that was provided by Frank Knight for an imperfect market is still relevant to understand systemic risk in the modern financial sector. According to Knight, risk is quantifiable by mathematical probability for success or failure whereas in the case of uncertainty it is not possible to know the outcome—rather, subjective judgment is applied to deal with uncertainty as the situation is unique in each case and decisions vary from case to case (Knight, Risk, uncertainty and profit. Sentry Press, 1921). However, Stockhammer and Ramskogler (2007) point out that John Maynard Keynes viewed the world as having different degrees of uncertainty rather than as a ‘dichotomy of uncertainty’ and ‘probabilistic certainty’ as identified by Knight. The ‘fundamental uncertainty’ is a key concept in the post-Keynesian discussion. Meaningful economic activities are considered as those for reducing and mitigating ‘uncertainty’ in the post-Keynesian tradition. On the other hand, institutional economists believe that institutions as rules can reduce uncertainty. (North, Understanding the process of economic change, Princeton University Press, 2005) argues that the institutional framework can create the incentives structure which would matter for reducing uncertainties. All business and investments are subject to fundamental uncertainties in the sense that the future is unknown. Therefore, the credit risk undertaken by bankers cannot be reduced to ‘risk’ as measurable uncertainties. In this context, the regulatory framework as a formal institution would be required to encourage banks to challenge themselves to absorb fundamental uncertainties while preventing them from taking excess risk and uncertainty.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-981-16-3472-7_1

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DOI: 10.1007/978-981-16-3472-7_1

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