Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risk

APPENDIX A

Sending the Herd Off the Cliff Edge

The Disturbing Interaction Between Herding and Market-Sensitive Risk Management Practices

In the international financial arena, G-7 policy makers chant three things: more market-sensitive risk management, stronger prudential standards, and improved transparency.¹ The message is that we do not need a new world order but that we can improve the workings of the existing one. While many believe this is an inadequate response to the financial crises of the last two decades, few argue against risk management, prudence, and transparency. Perhaps we should, especially with regards to market-sensitive risk management and transparency. The underlying idea behind this holy trinity is that it better equips ...