The unintended consequences of regulation

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In this inaugural ATC bulletin, Ashok Gupta outlines a list of unintended consequences of our regulatory framework – the damage caused to individuals and our financial system by good intentions.

These unintended consequences largely arise from over-reliance on a particular set of risks, the failure to consider a broader long-term perspective and embrace fundamental uncertainties, and to think through the aggregate outcomes using a systems-thinking lens. The complex interactions of assumptions of the rationality of market agents and market prices; over-reliance on mark-to-market valuation which can provide an incomplete picture of long-term insurance products, pensions and their providers; and an emphasis on short-term returns are at the heart of this problem.

Ashok was the Joint Deputy Chair of a Bank of England Working Group on Procyclicality 2012-2014.