Rethinking regulation of the modern financial system

Bank of Italy’s Maurizio Trapanese writes that rules need to address uncertainty as well as measurable risks, entity types as well as activities, and should not be overly complex

Regulation

The international financial system has shown a tendency towards increasing complexity during the last few decades. Economists have defined this complexity in terms of greater variety of types of financial intermediaries and instruments, longer intermediation chains, and greater interconnectedness among sectors. Overall, this complexity makes it difficult to trace and monitor each institution’s network of direct and indirect linkages.

In response to these developments, financial regulation has

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