The dangers of herd behaviour

Policy-makers should take note of flaws being pointed out in capital rules

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Policy-makers have appeared increasingly concerned about the unintended consequences of regulation recently. The European Commission, to give one example, has ordered a review of capital charges for long-term investments in infrastructure after determining that Solvency II might inadvertently cut off a valuable source of investment in the real economy. A working group at the Bank of England last year looked at the possible pro-cyclical effects of capital requirements if they become relatively he