Services on Demand
Journal
Article
Indicators
- Cited by SciELO
- Access statistics
Related links
- Cited by Google
- Similars in SciELO
- Similars in Google
Share
Revista de Economía Institucional
Print version ISSN 0124-5996
Abstract
HALDANE, Andreiv G and MADOUROS, Vasileios. THE DOG AND THE FRISBEE. Rev.econ.inst. [online]. 2012, vol.14, n.27, pp.13-56. ISSN 0124-5996.
This paper explores why the type of complex financial regulation developed over recent decades may be a suboptimal response to the increasing complexity of the financial system. Examples from other disciplines illustrate how decision-making in a complex environment can benefit from simple rules of thumb or 'heuristics'. We perform a set of empirical experiments to assess the relative performance of simple versus complex rules in a financial setting. We find that simple metrics, such as the leverage ratio and market-based measures of capital, outperform more complex risk-weighted measures and multiple-indicator models in their capacity to predict bank failure. A consistent message from these experiments is that complexity of models or portfolios can generate robustness problems. We outline five policy lessons from these findings, covering both the design of financial regulation itself and possible measures aimed at reducing complexity of the financial system more directly.
Keywords : Banking crises; financial regulation; complexity; financial stability.