![]() ![]() This problem is neatly illustrated by the European Central Bank’s composite indicator of systemic stress (CISS), which reported that the risk of a crisis was very low on the eve of the 2008 crisis, but very high when the crisis was over. Daníelsson compares this task to “driving while looking into the rearview mirror”. First, risk measures are based on past data, so they only work when the past is a reliable predictor of the future. But this strategy has significant problems. Much of it is based on trying to quantify risk, then making banks follow a prescriptive set of rules based on the resulting measurements. The goal is to avoid economically significant crises without unnecessarily restricting economic growth.ĭaníelsson argues that the current paradigm of financial regulation has lost sight of this goal. In financial regulation, the key risk to be managed is systemic risk. The word “risk” is used so freely in finance that it is easy forget how nebulous it is: it only has a meaning with respect to a specific outcome that one wishes to avoid. Jón Daníelsson’s excellent The Illusion of Control tackles this question through a highly accessible exploration of the nature of financial risk and the purpose of financial regulation. The word ‘risk’ is used so freely in finance that it is easy forget how nebulous it is. Might there be a better way to prevent crises? The privatisation of gains and socialisation of losses, considered a necessary injustice in 2008, is now official government policy. On the other hand, it loads the financial system with enormous amounts of moral hazard. ![]() On the one hand, swift action in the moment (hopefully) averts another global financial crisis. At the slightest hint of problems in the sector, regulators will find money to prevent banks from failing and cover their deposits. The COVID crisis, the failure of Silicon Valley Bank, and the collapse of Credit Suisse have clarified the modern approach to financial crisis prevention, which largely consists of repeating the better parts of the 2008 response as quickly as possible. The Illusion of Control: Why Financial Crises Happen, and What We Can (and Can’t) Do About It. Drawing from past and recent crises, this sharp, insightful book makes a strong case for policymakers to reappraise the current safeguarding paradigm, writes William Quinn. In The Illusion of Control: Why Financial Crises Happen, and What We Can (and Can’t) Do About It, Jón Daníelsson challenges conventional assumptions around risk and regulation used to prevent financial crises. ![]()
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