In a recent article, Warwick Business School professor John Thanassoulis explores the tension between financial stability and economic growth in modern banking regulation and how that impacts regulatory competition between countries.
In the aftermath of the 2008 financial crisis, regulators tightened oversight to reduce risky banking practices. However, Thanassoulis observes a recent shift as governments urge regulators to prioritize growth and attract international banks. "How onerous regulation is for a bank is a choice," he explains, noting that financial authorities can adjust regulatory and supervisory stringency to compete globally.
Using a game-theoretic model developed alongside researchers from the Bank of England, Thanassoulis finds that the impact of a growth agenda on levels of regulatory intensity depends on the competing regulators' original stances. Perhaps surprisingly, if a relatively growth-focused authority doubles down on that commitment, international levels of regulatory standards may actually remain stable or increase. But if a relatively stability-focused regulator shifts toward growth, a "cycle of competitive deregulation" — what some would call a "race to the bottom" — becomes more likely.
The author stresses that deregulation does not always lead to minimal oversight. "Banks themselves do not want minimal levels of regulation," he writes. However, when the potential fallout from a bank failure is considered to be small, regulators may "not be able to help themselves," triggering competitive deregulation.
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