I Do What I Do

by Raghuram G. Rajan

Taken together, these trends suggest that even though there are far more participants who are able to absorb risk today, the financial risks that are being created by the system are indeed greater. And even though there should theoretically be a diversity of opinion and actions by market participants, and a greater capacity to absorb risk, competition and compensation may induce more correlation in behaviour than is desirable. While it is hard to be categorical about anything as complex as the modern financial system, it’s possible that these developments are creating more financial-sector-induced procyclicality than in the past. They may also create a greater (albeit still small) probability of a catastrophic meltdown.