Simplicity is Good

Good piece in The Economist about the importance of simplicity and clarity in banking regulation. It summarizes a speech that Andrew Haldane, who is in charge of bank stability at the Bank of England, gave at Jackson Hole a few weeks ago. The title of the speech is, "The Dog and the Frisbee."

The basic idea is to use leverage ratios, rather than to risk-weight assets. I agree. After all, how risk-free were those zero-risk-weight bonds issued by European sovereigns?

From The Economist:

Mr Haldane uses the analogy of dogs, such as border collies, which are very reliable catchers of Frisbees without being aware of the complex calculations (wind speed, air resistance, etc) that might be involved. The rule which the dog’s brain has subliminally worked out is to run at a speed so that the angle of gaze to the Frisbee remains constant. 

A dog can catch a Frisbee because it uses a simple rule. If it tried to do the math -- obviously, it can't -- it would fail.

Haldane's bio is here.