Risk Awareness
Losses Must Be Cleared, Not Beautified
How markets, banks, and regulators restore tradability after mistakes.
Market losses are painful, but pretending they do not exist can turn a local problem into a system problem.
Price declines have a function. They reduce excessive valuation, clear unrealistic expectations, and create room for new capital. After the internet bubble, many weak firms disappeared, while real infrastructure and stronger firms survived.
Banks also need to recognize bad assets. If non-performing loans are hidden, the bank may appear stable while capital is quietly damaged. Japan’s post-bubble experience showed how delayed balance-sheet repair can contribute to long economic weakness.
Resolution order matters. Equity, subordinated debt, senior creditors, and depositors do not carry the same risk. The 2023 Credit Suisse AT1 controversy reminded investors that capital instruments must be read carefully. Yield without a clear loss order is dangerous.
Clearing is not chaos. Good resolution acknowledges loss, protects basic transaction order, and prevents panic from spreading. Bankruptcy, restructuring, write-downs, extensions, and legal priority allow the system to know how mistakes end.
Markets become tradable again when prices can be trusted, responsibility can be traced, and new money knows the rules.