Looking ahead of the current meltdown, there are calls for "greater transparency" to improve functioning of the financial markets. But whether this means improved availability of market information or better understanding of complex instruments, in neither case will greater transparency reduce systemic risk in financial markets. Indeed, in some cases greater transparency could make things worse. Regulators must now abandon their belief in the tired trinity of greater transparency, more disclosure and better risk management by firms. Instead they must turn to finding ways to develop a systemic approach to regulation, including pro-cyclical provisioning and system-wide stress testing, and confront the vicious market cycle of rising asset prices accompanied by higher leverage, and the even more vicious cycle running in reverse.
