  We show that any objective risk measurement algorithm mandated by central
banks for regulated financial entities will result in more risk being taken on
by those financial entities than would otherwise be the case. Furthermore, the
risks taken on by the regulated financial entities are far more systemically
concentrated than they would have been otherwise, making the entire financial
system more fragile. This result leaves three directions for the future of
financial regulation: continue regulating by enforcing risk measurement
algorithms at the cost of occasional severe crises, regulate more severely and
subjectively by fully nationalizing all financial entities, or abolish all
central banking regulations including deposit insurance to let risk be
determined by the entities themselves and, ultimately, by their depositors
through voluntary market transactions rather than by the taxpayers through
enforced government participation.
