It turns out that the growing number of regulation rules and principles (e.g. Basel III) has an adverse effect on taming the crisis.
Also the traditional Merton-Markowitz approach, that assumes a known probability distribution for future market risk and enables portfolio risk to be calculated and thereby priced and hedged, offers no help to solve the current crisis.
Haldane states that "More simple regulation based on 'Optimal choice under uncertainty' is necessarily. Haldane concludes:
"Modern finance is complex, perhaps too complex. Regulation of modern finance is complex, almost certainly too complex. That configuration spells trouble.
As you do not fight fire with fire, you do not fight complexity with complexity. Because complexity generates uncertainty, not risk, it requires a regulatory response grounded in simplicity, not complexity.
Delivering that would require an about-turn from the regulatory community from the path followed for the better part of the past 50 years. If a once-in-a-lifetime crisis is not able to deliver that change, it is not clear what will.
To ask today’s regulators to save us from tomorrow’s crisis using yesterday’s toolbox is to ask a border collie to catch a frisbee by first applying Newton’s Law of Gravity."
The Dog and the Frisbee
Haldane's (2012) presentation called 'Ensuring Long-Term Financial Stability', or more popular 'The dog and the frisbee', is a breakthrough in managing, modeling and controlling Risk and financial future results.
It's a MUST-read for board members in the financial industry.
Symetrics
Our team at Symetrics agrees with Haldane's approach. Just like in financial regulation, we need to simplify our risk models, risk frameworks and risk appetite defining process. How? Try us!
Or just take a look at our website: www.symetrics.eu.
Links:
- BOE Presentation Andrew Haldane
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