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Governing Risky and Uncertain Financial Markets

SWP Comment 2012/C 45, 19.12.2012, 8 Pages Research Areas

Have the post-crisis regulatory efforts made financial systems safer? The regulatory agenda is incomplete and therefore insufficient because it does not adequately deal with the fact that financial markets are characterized by both risks and uncertainties. When risks cannot be measured, because of lack of experience or incompleteness in our knowledge about the forces that shape financial markets, decision makers are in the world of uncertainty. The effectiveness of widely used risk management models is inversely related to the degree of uncertainty and complexity in financial markets. Financial systems remain more unstable and dangerous than they should be because policymakers continue to delegate risk assessment and management to the members of the financial community without asking hard questions about the conditions under which risk models can work. The »macroprudential« approach to financial governance takes both uncertainty and risk seriously and thus is a better route to more robust financial systems.