Book

Description

Building upon the distinction between measurable risk and uncertainty, this book outlines the fundamentals of the main financial regulatory frameworks of the last two decades (with a focus on the Basel Accords). The density and complexity of the current regulatory regime has raised some concerns, in particular since excessive regulatory complexity may create barriers to entry for new comers, limiting or even impeding competition and innovation in the financial system. At the same time, the burden imposed on the regulated entities encourages the transfer of risks outside the regulatory perimeter, thus amplifying systemic risk.
Since modern finance is characterised by uncertainty (rather than risk), less complex rules could be given greater consideration. Rebalancing regulation towards simplicity, a step that has been undertaken with the final Basel III Accord, may encourage better decision making by authorities and regulated entities. As addressing systemic risk in a complex financial system should not entail the replacement of overly complex rules with overly simple or less stringent regulations, the real challenge is to define criteria and methods to assess the degree of unnecessary complexity in regulation.