The paradox of perfect supervision

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Each financial crisis brings more financial supervision, more models and larger buffers – but still fragility persists. The paradox of perfect supervision is that the very attempt to safeguard stability can increase systemic risk by increasing complexity and synchronising behaviour. This column argues that resilience, not ever-tighter risk-informed control, should be the organising principle of supervision, rooted in the basic idea that has long governed finance itself: diversification.

Published on VoxEU / CEPR