Simplifying bank rules may invite systemic risk, research warns

The paper, set for presentation at the European Central Bank’s Sintra conference, suggests that the current push to simplify banking oversight may prove counterproductive. Mariassunta Giannetti of the Stockholm School of Economics and her co-authors found that when rules become easier to interpret, they also become easier to exploit. Banks often respond to these simplified frameworks by shifting risks into less transparent corners of the financial system.

This trend challenges the prevailing strategy in Washington and London, where officials are easing capital requirements and reviewing constraints like ring-fencing to boost market flexibility. While the European Union is attempting to simplify its rulebook while maintaining capital buffers, the authors warn that removing the granular, load-bearing elements of regulation could undermine stability. Switzerland’s recent, more rigid response to the collapse of Credit Suisse serves as a counter-example, favoring technical density over simple convenience to prevent exploitation. The study notes, however, that its findings are limited to listed institutions and may not fully account for the rising risks hidden within the private credit and equity-backed lending sectors.