First, we need to counter mechanisms leading to herding behaviour and establish the right incentives for achieving a balance between short-term and long-term investors and intermediaries. Second, we need to address the lack of transparency. Financial regulators need to tighten up requirements in certain segments of the markets and strengthen reporting requirements for formerly unregulated institutions.
Third, in order to address the “excessive” procyclicality of the financial systems, we need to address the mechanisms that intensify fluctuations. For example, capital regulations and provisioning rules as developed by the Basel Committee of Banking Supervision need to restrain excessive risk-taking in upturns and discourage excessive conservatism when credit to firms and households is most needed.