“Any Regulation of Risk Increases Risk” is an interesting paper illustrating quantitatively what a lot of people already think qualitatively (see past post for example), which is that regulation nearly always falls foul of the law of intended consequences. Through the use of regulatory driven capital charge calculations, banks are biassed towards investing in a limited and hence overly concentrated set of assets that at the time of investment exhibit abnormally low levels of volatility. Thanks to PRMIA NYC for suggesting this paper.
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