probably have to ask a physicist for help. yet despite this complexity, efforts to catch the crisis frisbee have continued to escalate. casual empiricism reveals an ever - growing number of regulators, some with a doctorate in physics. ever - larger litters have not, however, obviously improved watchdogs ’ frisbee - catching abilities. no regulator had the foresight to predict the financial crisis, although some have since exhibited supernatural powers of hindsight. so what is the secret of the watchdogs ’ failure? the answer is simple. or rather, it is complexity. for what this paper explores is why the type of complex regulation developed over recent decades might not just be costly and cumbersome but sub - optimal for crisis control. in financial regulation, less may be more. section 2 sets out the reasons why that might be, drawing on examples from outside economics and finance. section 3 contrasts that thinking with the rapidly rising - tide of financial regulation. sections 4 to 6 consider some experiments to assess whether less could be more in financial systems. section 7 draws out some public policy implications. when less is more mainstream economics and finance is dominated by models of decision - making under risk. modern macroeconomics has its analytical roots in the general equilibrium framework of kenneth arrow and gerard debreu ( arrow and debreu ( 1954 ) ). in the arrow - debreu bis central bankers ’ speeches framework, the probability distribution of future states of the world is known by agents. risk can be securitised and thereby priced and hedged. modern finance has its origins in the portfolio allocation framework of harry markowitz and robert merton ( markowitz ( 1952 ), merton ( 1969 ) ). this merton - markowitz framework assumes a known probability distribution for future market risk. this enables portfolio risk to be calculated and thereby priced and hedged. together, the arrow - debreu and merton - markowitz frameworks form the bedrock of modern macroeconomics and finance. they help explain patterns of behaviour from consumption and investment to asset pricing and portfolio allocation. this has been a well - trodden path for the past 50 years. the path less followed has been to study optimal choice under uncertainty – the inability to form priors on the distribution of future outcomes – rather than risk ( knight ( 1921 ) ). neither the arrow - debreu nor merton - markowitz frameworks admit such uncertainty. instead, modern macro and finance has been built

delirious excitement. there was, however, an outbreak of delirium within the pra – which i can assure you is an exceedingly rare event, in part due to the dour leadership style i try to affect. the reason for this was the government ’ s view that “ the most effective way to [ implement these regulations ] is to delegate responsibility for the implementation of firm requirements to the regulators, subject to an enhanced accountability framework. this means that the vast majority of the updated banking regime will be implemented in pra rules. ” in short, for implementing this set of basel rules the government proposes to move back to a more british style of regulation, with the rules made by regulators rather than set out in law. this is quite different from the eu approach, where a huge volume of detail is locked down in law because that is the only practicable way to ensure that 27 countries do the same thing. absent that imperative, it makes much more sense to have these details in regulators ’ rules, as most other countries do, so that we can keep pace with developments in financial markets and adapt the rules as needed – subject, of course, to us being fully accountable to parliament for our actions. now this may sound rather boring. indeed, to everyone apart from me and the pra policy team it is rather boring! so boring in fact that when i gave an inordinately long speech on this topic i went all the way to switzerland so that i could inflict it on their bankers rather than all of you – had i done otherwise i am sure the lord mayor would finally have banned me from speaking at this event. but this is a very, very important issue for financial services in the uk because it is the fundamental bedrock of increased dynamism in our all speeches are available online at www. bankofengland. co. uk / news / speeches and @ boe _ pressoffice regulation. i am delighted therefore that this is the approach the government has proposed in its consultation on the future regulatory framework, and i hope that it will be taken forward as the wider regime develops. graduation at this point i fear that the chair whom i annoyed so much last year is becoming restive again, fearing a long lecture on regulatory plumbing. so let me stick with dynamism, but move us on to something a little more tasty that we have been cooking up in the pra kitchen. we made changes to simplify the credit union regime last year