When the great, the good and the media assembled in Davos for the World Economic Forum in January, one topic dominated the financial agenda — risk. That ought to be a good sign. For it is when those in charge are feeling complacent that disaster is most likely to happen. Investors also seem nervous. A survey of fund managers by Merrill Lynch, an investment bank, found 82% expected volatility to rise this year.
However, as the Bible says, "by their fruits ye shall know them". Banks are still financing leveraged buy-outs, junk bonds are offering their lowest spreads since March 2005, and the cost of insuring against a share-price fall, as measured by the Chicago Board Options Exchange Volatility Index (Vix), is low (see chart at the bottom of the page). Financiers may be worrying about risk, but they do not seem to be doing much about it.