Incentives to game risk weights can be constrained by imposing floors and/or by using standardised approaches for certain categories of assets.22 Some countries already make use of such approaches, including the US, the UK, Germany, France and Spain. The stress-testing regimes operating in a number of countries are also a way of cross-checking, and backstopping, the models used by banks. In a world of uncertainty as well as risk, having this portfolio of approaches for dealing with avoidance incentives - some discretionary, others rule-like - makes sense. Evidence on the incentive effects of financial regulation is almost always drawn from looking at banks’ experience either side of a change in policy. By then, however, any unintended or undesirable consequences of this change will already have been felt. Regulatory policy is in a perpetual catch-up loop, the bloodhounds in pursuit of the greyhounds. In an ideal world, it would be possible to gauge in advance how a regulatory change may reshape incentives, in particular risk-taking or regulatory-avoiding incentives. One approach to doing so is to use experimental methods. Experiments have previously been used to examine how different pay structures affect loan officers’ risk assessment and lending decisions (Cole, Kanz and Klapper (2015)). They have also been used to examine the effect of specific interventions on behaviour in other areas of public policy (Halpern (2015)). Recently, the Bank of England has conducted a lab experiment to assess how the design of pay regulation may affect risk-taking behaviour and project search effort (Harris et al (forthcoming)).
Similarly, there are also lessons to be learned in regard to the experience in the communication of supervisory stress test results in Europe and the United States. Conclusion Given the dynamics of the financial markets today, more effective engagements between policy makers and the industry, both within and across borders have never been more important so as to bring about a greater awareness of key financial stability issues, to further sharpen supervisory and management judgements and to promote greater collaboration on multiple fronts. Enhanced prospects for greater global financial stability depend on a sustained commitment to these priorities. Ultimately, the goal is to strengthen our collective ability to anticipate and respond effectively to developments that affect financial stability, not just in these present challenging times, but through what will likely be an extended period of global adjustments going forward. 4  BIS central bankers’ speeches