The Systemic Risk Centre (SRC) at the London School of Economics (LSE) believes that compared to Basel II regulations for banks Basel III measured and forecast risk inaccurately.

According to a new report from the London School of Economics, regulations that force all banks to implement the same preventative techniques could risk making financial markets less secure and could trigger another crash.

The SRC say that financial institutions have been encouraged to adopt similar models without being sure that the model being used is the safest and if all use the same techniques, all will fail if another crash occurs. “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 report said.

The SRC also warned regulators that some aspects of the financial system have not been made safe and should not be assumed secure, despite businesses complying with regulations.

Jon Danielsson and Jean-Pierre Zigrand, professors at LSE, explain that although it is not possible to fully eradicate risk, regulators should more on forming a less dangerous market. “The objective should be a more resilient financial system that is less prone to disastrous crises while still delivering benefits for wider society,” Danielsson and Zigrand said.

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