“One of the unfortunate side effects of regulation is that it tacitly encourages the development of business models designed to avoid it. Loopholes are inevitably exploited. Complex structures are created to circumvent regulations. Assets and liabilities are moved around to create the impression of a sounder balance sheet that is in fact the case. It’s all a game of smoke and mirrors. And it works - as long as people believe it.
We don’t know how many banks are actively avoiding regulation and exposing their stakeholders to excessive risk. But as we have seen, it only takes a couple of rogue banks to destabilise the whole system.”
