Measuring Regulatory Complexity

45 Pages Posted: 11 Feb 2020

See all articles by Jean-Edouard Colliard

Jean-Edouard Colliard

HEC Paris - Finance Department

Co-Pierre Georg

University of Cape Town; Deutsche Bundesbank

Multiple version iconThere are 2 versions of this paper

Date Written: February 2020

Abstract

Despite a heated debate on the perceived increasing complexity of financial regulation, there is no available measure of regulatory complexity other than the mere length of regulatory documents. To fill this gap, we propose to apply simple measures from the computer science literature by treating regulation like an algorithm: a fixed set of rules that determine how an input (e.g., a bank balance sheet) leads to an output (a regulatory decision). We apply our measures to the regulation of a bank in a theoretical model, to an algorithm computing capital requirements based on Basel I, and to actual regulatory texts. Our measures capture dimensions of complexity beyond the mere length of a regulation. In particular, shorter regulations are not necessarily less complex, as they can also use more "high-level" language and concepts. Finally, we propose an experimental protocol to validate measures of regulatory complexity.

Keywords: Basel Accords, Capital regulation, financial regulation, Regulatory Complexity

JEL Classification: G18

Suggested Citation

Colliard, Jean-Edouard and Georg, Co-Pierre, Measuring Regulatory Complexity (February 2020). CEPR Discussion Paper No. DP14377. Available at SSRN: https://ssrn.com/abstract=3535463

Jean-Edouard Colliard (Contact Author)

HEC Paris - Finance Department ( email )

France

Co-Pierre Georg

University of Cape Town ( email )

Private Bag X3
Rondebosch, Western Cape 7701
South Africa

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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