Is the fact that different banks have different risk models problematic? Contrary to the Basel Committee and the European Banking Authority, this column argues that heterogeneity is a good thing. It leads to countercyclicality, and thereby reduces instances of procyclical price movements. Both the Basel Committee and the European Banking Authority have indicated that they are troubled by heterogeneity and are seeking to rectify the problem. Their conclusion is plainly wrong.

The current global crisis highlights how interconnected the financial world has become. This interconnectedness is a challenge for global systemic risks analysis. This column argues that much of the data needed for tracking systemic risk are not available and that, in fact, world decision makers are leading in the dark. Recent initiatives that aim to improve aggregate banking statistics and gather better institution-level data are welcome, but the complexity of the system means that we won’t have the data we need for some time yet.

How do members of existing monetary unions share risk? Drawing on a decade of research, this column argues that fiscal transfers in fact make a limited contribution to economic coherence. In the context of Europe’s current crisis, the evidence suggests that unfinished capital market integration must be completed if we wish to see adequate and effective risk sharing.

Measuring financial risk is difficult. But what lessons, if any, have we learnt from the current crisis? This column argues against a move to leverage ratios and instead proposes continuing to measure financial risk (despite the difficulties), but with higher capital charges for banks. Focusing on the basics can only bolster central banks’ ability to fulfil their duties – looking for imbalances, and promptly tackling them with informed decisions.

Ever since the fall of Lehman Brothers, it has been a popular view – and one increasingly held by officials – that banker bonuses are at least partly to blame. This column compares executive pay in banks with other companies and finds, contrary to the growing consensus, that the financial sector differs not so much in its reward for taking risks, but in its reward for expansion.

With the ongoing financial turmoil in Europe, many emerging market countries are now deemed less risky than so-called “advanced” countries. This column examines why this is the case and finds that the cyclicality of a country’s fiscal policy – a sign of its riskiness – is inversely correlated with the quality of the country’s institutions.

Contingent Convertible (CoCo) bonds have been suggested as a way to ensure that banks keep aside enough capital to help them through financial crises. This column proposes a market-triggered CoCo buffer to maintain risk incentives during periods of high leverage. It argues that this will also activate risk information discovery through the market prices of bank securities and increase activism by outside shareholders.

Why do financial market anomalies arise and persist? This column summarises a new thread in financial economics – the "limits of arbitrage" literature – explaining how financial institutions sometimes lack the capital needed to arbitrage away anomolies. This new approach has far-reaching implications for our understanding of how financial markets work and how they should be regulated.

There is a strong consensus that banks had insufficient reserves set aside for a rainy day and that they should be required to hold more capital. This column says we should differentiate institutions less by what they are called and more by how they are funded. Encouraging individual risks to flow to those who can absorb them would make the system safer and introduce new players with risk capacities.

Bank bonuses have been blamed for contributing to the crisis, and regulators and politicians are now demanding changes in compensation arrangements. Most of these calls are based on a misconception of the nature of financial risk, an inflated view of the efficacy of risk models, and an incorrect view of the incentive issues facing financial institutions. This column proposes reforms that would discipline senior managers by exposing them to the dangers of junior managers’ risk taking.