Surveys indicate that relative income and wealth are crucial to perceptions of happiness.7 Economic theories of wages, asset prices, employment and consumption often embed concerns about relative standing.8 When making many of life’s choices, it appears to be important to “keep up with the Jones’s”, to earn and spend with reference to one’s neighbour. This concern with relative standing sows the seeds of arms-race behaviour. Finance is far from immune to these pressures. Indeed, some structural features of the financial system make it particularly prone to arms-race behaviour. One such structural feature is information asymmetry. Imperfections in information generate risk. Finance provides an information bridge between end-savers and investors, thereby prospectively reducing risk. Success in finance means forming that bridge at least cost and risk to those travelling across it. But judging how much risk is really being taken, and whether it is being managed well, is rarely easy for either end-savers or end-borrowers. Risk shows its true face perhaps only once in a generation. So as much as investors might wish to risk-adjust their returns, this is a daunting informational task. Facing this problem, many participants in the financial system (investors, managers, trustees, remuneration committees, pay consultants etc.) have resorted to simpler, indirect metrics to gauge skill in navigating risk. Ranking is one such performance metric. It provides a simple way of ordering the apples, the oranges – and in particular the lemons.

First, because they generate sub-optimal outcomes, policy intervention can be justified. This policy intervention ought to act like a self-denying ordinance for financial firms, a protection against themselves. It ought not to be a tug-of-war between regulator and regulated. Rather, it aims to defuse a competitive tug-of-war among regulated firms. Second, to be effective this intervention needs to constrain behaviour across the financial system as a whole; it requires multilateral disarmament. Acting to constrain only those at the top of the league (those bearing most risk, trading at greatest speed, seeking greatest safety) will do nothing to defuse competitive pressures lower down the pecking order. Indeed, it might even conceivably intensify the competitive scramble. In the language of financial regulation, policy needs to have a macro-prudential, as distinct from micro-prudential, perspective.28 The need for a system-wide perspective to preserve the public good of the commons was recognised by Garret Hardin almost 50 years ago. It has been increasingly recognised by financial regulators over the past five years. Over that period, we have seen the emergence of explicitly macro-prudential agencies charged with safeguarding systemic risk in a number of countries. In the United States we now have a multi-agency Financial Stability Oversight Council (FSOC), in Europe the multi-country European Systemic Risk Board (ESRB) and in the UK the Financial Policy Committee (FPC). 27  Gai and Shin (2004) develop a model of a race to the exit, with investors seeking progressively to shorten the maturity of their investment to reduce risk. 28  Bank of England (2011a).