Are regulations increasing risk?

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According to a new report from London School of Economics (LSE), regulations that force all banks to implement the same preventative techniques could make financial markets less secure and trigger another crash.

The Systemic Risk Centre (SRC) say that financial institutions have been encouraged to adopt similar models without being sure that the model being used is the safest and if all use the same techniques, all will fail if another crash occurs. “If the authorities pick one modelling approach over another, they may just as easily be backing the wrong horse, a model that is less accurate,” the report said.

The Telegraph revealed that the SRC believed that Basel III was in fact measured and forecast risk inaccurately compared to the previous Basel II regime. The SRC also warned regulators that some aspects of the financial system have not been made safe and should not be assumed secure, despite businesses complying with regulations.

Alongside this, the report highlighted that regulators have been living with a false sense of security since the 2008 crash and a manifestation of, the famous economist, Hyman Minsky’s caution that “stability is destabilising,” according to the Telegraph.

Jon Danielsson and Jean-Pierre Zigrand, professors at LSE, explain that although it is not possible to fully eradicate risk, regulators should more on forming a less dangerous market. “The objective should be a more resilient financial system that is less prone to disastrous crises while still delivering benefits for wider society,” Danielsson and Zigrand said.

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