Regulatory rules of the past sought to reflect risk. Regulatory rules of the future will need to seek to reflect uncertainty.
That calls for a quite different, and sometimes seemingly perverse, approach. Under uncertainty, many of our intuitive regulatory rules of thumb are turned on their head: slower can be faster, less can be more, slack can be tight. Instinctively a complex financial system seems likely to require complex control rules. And under risk, that intuition is roughly right. Under uncertainty, however, it is precisely wrong.
Andy Haldane’s latest paper: “Tails of the unexpected”.