Here's the dilemma. The official purpose of banking regulation is to protect the whole system from risk. But the actual effect of controlling each bank separately (whether in terms of capital ratios or any other measure) is to encourage the concentration of risk, which makes the whole system more risky.
Counter-productive regulation is an extremely common phenomenon. Stafford Beer's POSIWID principle tells us that the de facto purpose of a complex system is often at odds with the official purpose.
True systems thinking on the part of legislators and regulators might lead us to more effective and appropriate ways of regulating the whole system than simply imposing controls on the individual players within the system. But what's the chance of that happening?
Jane Merriman, Big banks winners from new contingent capital move (Reuters, 27 August 2010)
Related posts Does Britain need smaller banks? (April 2009), Bearing Limit and Financial Regulation (September 2010)
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