Heavier Regulation May do Little to Reduce Financial Risk


“It is debatable whether a heavier degree of regulation will actually make financial institutions safer,” write Alan Gemes, Peter T. Golder, and Thorsten Liebert. “Throughout 2008, markets, not regulators, provided the first signals of crisis. The true riskiness of FIs and financial transactions can best be determined closest to the source of risk buildup. Proposals for different types of FIs need to take into account their different risk profiles. This asymmetry of information and the lack of transparency are likely to lead to a more restrictive level of regulation than would be optimal.”

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