Any regulation of risk increases risk

Philip Z. Maymin, Zakhar G. Maymin

Research output: Contribution to journalArticle

Abstract

We show that any objective risk measurement algorithm mandated by central banks for regulated financial entities will result in more risk being taken by those financial entities than would otherwise be the case. Furthermore, the risks taken by the regulated financial entities are far more systemically concentrated than they would have been otherwise, making the entire financial system more fragile. This result leaves three options for the future of financial regulation: (1) continue regulating by enforcing risk measurement algorithms at the cost of occasional severe crises, (2) regulate more severely and subjectively by fully nationalizing all financial entities, or (3) abolish all central banking regulations, including deposit insurance, thus allowing risk to be determined by the entities themselves and, ultimately, by their depositors through voluntary market transactions, rather than by the taxpayers through enforced government participation.

Original languageEnglish (US)
Pages (from-to)299-313
Number of pages15
JournalFinancial Markets and Portfolio Management
Volume26
Issue number3
DOIs
StatePublished - Sep 2012

Keywords

  • Basel
  • Crisis
  • Regulation
  • Risk
  • Risk management
  • Value-at-risk

ASJC Scopus subject areas

  • Accounting
  • Finance

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