The fundamental reasons why financial crises start may not have changed much over the centuries, given the immutable qualities and pathologies of human nature. However, the nature of the financial system has changed — it has become secularly more interconnected, immediate, global and complex. The regulatory climate had not adjusted to these changes, leaving us ill-prepared to prevent the recent financial crisis. For all the rhetoric to the contrary, regulators’ frameworks continue to be based on an institutionally outdated understanding, poorly suited to tackle the dynamic nature of the financial ecosystem and its changing roster of participants. Thus, the next crisis may already be brewing; and despite the hostility to banks and bankers, the system is not as resilient as it could be. We argue that the regulatory framework has to be reconsidered, so as to better track and respond to the changing industry architecture of financial services. Our paper provides an appreciative analysis of what happened during the recent crisis, and offers recommendations for a regulatory rethink. We illustrate this by considering the changing architecture of the financial system, paying particular attention to the evolution of new business models over the last decades, both in the regulated part of financial services and the alternative investments ecosystem that has co-evolved with it. We cast the recent financial crisis and regulatory responses in the context of this framework, and outline an ecosystem-based approach that looks at the dynamics of the sector’s architecture. We close with recommendations for the regulatory approach and practice.
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