How to restore financial stability

In 2008, the global financial system came close to collapse. Ever since, policy-makers have been busy overhauling the way it is regulated and supervised. Will this flurry of activity produce a more stable financial system – and if it does, at what cost? Many of the changes afoot are desirable. But the reform agenda suffers from three flaws: side-issues are getting more attention than they deserve; regulation is doing all the heavy lifting; and not enough attention is being paid to the combined impact of all the changes underway. The regulatory burden is rising, therefore, but policy may not be taking the optimal path to greater stability. To do so, the reform agenda needs to be guided by a clearer sense of priorities.