By Jonathan Davies
Greater regulation on the banking industry could in fact cause an even bigger financial crisis than the one in 2008, according to the London School of Economics (LSE).
The LSE's Systematic Risk Centre (SRC) said the regulators forcing banks to approach risk forecasts in the same way could leave the industry vulnerable in other areas.
The research claimed that this kind of regulation was creating a false understanding that “that there is one knowable and correct model” to prevent another crash.
The report said: “If the authorities pick one modelling approach over another, they may just as easily be backing the wrong horse, a model that is less accurate.”
The SRC highlighted the removal of the cap on price of the Swiss franc against the euro which “demonstrates the inherent weaknesses of the regulator-approved standard risk models". The Swiss government has limited the price of the Swiss franc against the euro, but lifted that restriction causing the currency to surge. It created huge problems in investment and shares.
LSE professors Jon Danielsson and Jean-Pierre Zigrand said: “While it is not possible to eliminate systemic risk or the incidence of crises entirely, the objective should be a more resilient financial system that is less prone to disastrous crises while still delivering benefits for wider society.”