1/6
I suppose its good that regulators are looking in more places for potential vulnerabilities in the global financial system, but I wonder if the approach to risk management isn't fundamentally flowed.
ft.com
I suppose its good that regulators are looking in more places for potential vulnerabilities in the global financial system, but I wonder if the approach to risk management isn't fundamentally flowed.
ft.com
2/6
Hyman Minsky argued that you can cannot regulate risk away. All you can do is chase it from one set of institutions and instruments to another, and if you end up hiding it, you risk making the system even more vulnerable than otherwise.
Hyman Minsky argued that you can cannot regulate risk away. All you can do is chase it from one set of institutions and instruments to another, and if you end up hiding it, you risk making the system even more vulnerable than otherwise.
3/6
What is more, he argued, financial systems are learning systems, and regulations that reduce one kind of risk will cause participants to behave even more riskily. We saw this recently, for example, in the attempts by central banks to reduce liquidity risk.
What is more, he argued, financial systems are learning systems, and regulations that reduce one kind of risk will cause participants to behave even more riskily. We saw this recently, for example, in the attempts by central banks to reduce liquidity risk.
4/6
I think few financial historians would disagree, and certainly it would be hard to conclude from the past few decades of large systemic crises and highly speculative financial markets that our approach to risk management has resulted in a "better" financial system.
I think few financial historians would disagree, and certainly it would be hard to conclude from the past few decades of large systemic crises and highly speculative financial markets that our approach to risk management has resulted in a "better" financial system.
5/6
Minsky argued that rather than try to eliminate financial crises, which is impossible, a better policy would be to make them manageable. This would involve breaking up the financial system into smaller, more discrete components with limited transmission between them.
Minsky argued that rather than try to eliminate financial crises, which is impossible, a better policy would be to make them manageable. This would involve breaking up the financial system into smaller, more discrete components with limited transmission between them.
6/6
In that case excessively risky behavior by one set of institutions can be resolved efficiently through a highly localized crisis that wipes out foolish players without threatening the overall economy. Among other things this would improve financial discipline.
In that case excessively risky behavior by one set of institutions can be resolved efficiently through a highly localized crisis that wipes out foolish players without threatening the overall economy. Among other things this would improve financial discipline.
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