An Incentive-Robust Programme for Financial Reform

Leading up to the recent crisis, government encouraged risky lending, and failed to measure banks' risks credibly or to require sufficient capital. Regulators also failed to losses or enforce intervention protocols for timely resolution. This paper proposes radical policy changes to prevent a recurrence. The need is not for more complex rules and more supervisory discretion, but rather for simpler rules that are meaningful in measuring and limiting risk, hard for market participants to circumvent and credibly enforced by supervisors. Ten "incentive-robust" regulatory reform proposals are developed that together would constitute the beginning of an effective new regime.