FRANKFURT, June 25 - Research due to be presented to central bankers at the European Central Bank's Sintra conference next week cautions that efforts to simplify bank regulation in the United States and Britain could unintentionally reduce the safety of the financial system.
The paper, authored by a team that includes Mariassunta Giannetti of the Stockholm School of Economics, argues that regulatory complexity can serve a pragmatic function: it makes rules harder to evade. The researchers report that rules which appear straightforward and stringent on paper are often more easily gamed, because banks can shift exposures to other parts of the financial sector.
"Our evidence suggests the U.S. rollback risks going too far," the authors write, and they add that Britain is gradually moving in a similar direction. Those assessments come amid policy moves in both countries: in the United States, regulators are loosening supervision and trimming capital requirements with the stated aims of supporting lending and fostering innovation. In Britain, policymakers are reassessing post-crisis constraints such as ring-fencing to provide banks with greater flexibility.
The study flags a core tension in regulatory design - rules that are easier to apply and enforce can also present clearer avenues for circumvention. That concern underpins the researchers' view that simplification efforts risk unintended consequences unless they preserve elements that are essential to a rule's effectiveness.
By contrast, the paper notes that efforts underway in the European Union to streamline the regulatory rulebook while maintaining overall capital requirements are broadly in line with the study's implications, provided simplification does not strip out what the authors call "load-bearing" components of regulation.
Switzerland's response after the 2023 failure of Credit Suisse is cited as consistent with the pattern identified in the research: regulators there have adopted stricter requirements complemented by sufficient detail to limit loopholes.
The authors also caution that their findings rely on market data from listed financial institutions. As a result, the analysis may not fully reflect risks in less-regulated areas of finance, explicitly including private credit and private equity-backed lending.
Overall, the study presents a cautionary perspective for regulators considering simplification initiatives, stressing that clearer, simpler rules are not necessarily safer if they make evasion more straightforward.