Simpler Bank Regulations Risk Creating Loopholes and Threaten Financial Safety
Research Challenges Push to Simplify Financial Rules
FRANKFURT, June 25 (Reuters) - Moves to simplify bank regulation in the U.S. and Britain could end up making the system less safe if rules become easier for lenders to circumvent, according to research that challenges the push to cut red tape.
Complexity as a Deterrent to Circumvention
The paper, to be presented to top central bankers at the European Central Bank’s Sintra conference next week, found that complexity in financial rules can play a useful role by making them harder to get around.
Researchers, including Stockholm School of Economics professor Mariassunta Giannetti, showed that simpler rules, even if they look as tough on paper, are more likely to be gamed as banks shift risks elsewhere in the system.
Risks of Regulatory Rollbacks
"Our evidence suggests the U.S. rollback risks going too far," the authors said, adding that Britain was also slowly moving in the same direction.
Global Trends in Banking Regulation
The findings run against a broader trend. In the United States, regulators are easing supervision and capital requirements in a bid to support lending and innovation. Britain is also reviewing post-financial crisis constraints such as ring‑fencing to give banks more flexibility.
The study suggests this approach may carry unintended consequences, as rules that are easier to apply are also easier to sidestep.
Approaches in the European Union and Switzerland
In the European Union, policymakers are trying to simplify the rulebook without reducing overall capital requirements. The researchers say that balance is broadly consistent with their findings, as long as simplification does not remove what they call "load‑bearing" elements that keep rules effective.
Switzerland’s tougher stance after the 2023 collapse of Credit Suisse also fits the pattern identified in the paper, combining strict requirements with enough detail to limit loopholes.
Limitations and Scope of the Study
The authors caution the results are based on market data covering listed financial institutions, meaning they may not capture risks in less‑regulated areas such as private credit or private equity-backed lending.
(Reporting by Francesco Canepa; Editing by Milla Nissi-Prussak)
