Regulatory complexity and the quest for robust regulation

On June 4th, the Advisory Scientific Committee of the European Systemic Risk Board has published a report discussing how excessive regulatory complexity can contribute to systemic risk and possible ways to address the issue, in view of the existing significant complexity and uncertainty in the financial system.

The report starts with an explanation of the recent perceived increase in regulatory complexity and tries to identify the factors behind it.

According to the report, excessive complexity in financial regulation may contribute to the scale of systemic risk in the financial system. Regulatory frameworks that are excessively complex can create the illusion of a well-controlled system, while creating incentives for players to game the system, possibly leading to additional risks. Complex regulatory frameworks may provide regulators with a false sense of safety (analogous to the “illusion of control”).