31 August 2012

BoE Haldane: “In financial regulation, less may be more”

Andrew Haldane has criticised the "familiar response" of regulators to plug gaps in regulation and risk management in the wake of the financial crisis, arguing that complex systems of rules make the complex environment of financial markets prone to "catastrophe".

Noting that successive Basel capital regimes have been an order of magnitude longer than their predecessors, Haldane suggests that the length of the agreements even understates the complexity of the “several million” calculations required now compared to under Basel I. This wide-ranging critique of regulatory complexity suggests that the “steadily-rising regulatory tower” is not conducive to stability, with Haldane arguing that “complex rules may cause people to manage the rules, for fear of falling foul of them. They may induce people to act defensively, focusing on the small print at the expense of the bigger picture”.

The answer, Haldane suggests, would be to “simplify and streamline the control framework”. He suggests this could be achieved through a “de-layering” of the Basel structure, a stronger leverage requirement, strengthened supervisory discretion, explicit complexity regulation, and a structural reconfiguration of the financial system.

The paper concludes by suggesting that not only is modern finance “perhaps too complex”, but that so too is its regulation, and that it might require an “about-turn from the regulatory community” to alter the course of the last half century.

Full paper

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