Any regulation of risk increases risk
AbstractWe show that any objective risk measurement algorithm mandated by central banks for regulated financial entities will result in more risk being taken by those financial entities than would otherwise be the case. Furthermore, the risks taken by the regulated financial entities are far more systemically concentrated than they would have been otherwise, making the entire financial system more fragile. This result leaves three options for the future of financial regulation: (1) continue regulating by enforcing risk measurement algorithms at the cost of occasional severe crises, (2) regulate more severely and subjectively by fully nationalizing all financial entities, or (3) abolish all central banking regulations, including deposit insurance, thus allowing risk to be determined by the entities themselves and, ultimately, by their depositors through voluntary market transactions, rather than by the taxpayers through enforced government participation. Copyright Swiss Society for Financial Market Research 2012
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Bibliographic InfoArticle provided by Springer in its journal Financial Markets and Portfolio Management.
Volume (Year): 26 (2012)
Issue (Month): 3 (September)
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Web page: http://www.springerlink.com/link.asp?id=119763
Regulation; Crisis; Risk management; Value-at-risk; Risk; Basel; G18; G21; G28; G38;
Find related papers by JEL classification:
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
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