Bank fraud and Dieselgate: how do we design regulations that are harder to cheat?

Tim Harford points out that Dieselgate -- when VW designed cars that tried to guess when they were undergoing emissions test and dial back their pollution -- wasn't the first time an industry designed its products to cheat when regulators were looking; the big banks did the same thing to beat the "stress tests" that finance regulators used to check whether they would collapse during economic downturns (the banks "made very specific, narrow bets designed to pay off gloriously in specific stress-test scenarios" so that they looked like they'd do better than they actually would). (more…)