Does Simplification Mean Deregulation?

By José María Roldán Alegre, Senior Advisor Kreab

I have always considered myself a financial regulator, and even though eleven years have passed since I left the official sector, I continue to feel that way. As my colleague Daniel Nouy used to say, “once a supervisor, always a supervisor.”

I know the regulatory world from an insider perspective, but also as an outsider that has followed the evolution of the discussions among my former colleagues. And the truth is that I know no regulator, from junior to senior positions, that does not think that financial regulation has become disproportionately and pointlessly complicated. As an example, the word count of just the Basel III Accord (just one aspect of financial regulation) exceeds that of the three volumes of Tolkien´s “The Lord of the Rings” or Tolstoy’s “War and Peace.” And examples are not limited to the legislative texts. Recently, a senior supervisor explained to a very big audience the story of his first meeting of a supervisory college (the multi jurisdiction meeting of supervisors looking after international banks). He insisted in having all the papers that were going through the college of supervisors printed, but he was told it was impossible: they wouldn’t even fit in a suitcase! Or take the example of prospectus: the latest IPO prospectus filed in the SEC (as of July 2025) has more than 26.000 words (and we are talking about a company with just 14 employees and research and development expenses of 16 million dollars). And we should add DORA, or the EU Green Taxonomy to the list.

And sure, we are regulating a complex industry, and we need to take care of a multitude of aspects, from financial stability to investor protection. But frankly speaking, things are starting to be out of control. We run the risk of creating a divorce between the mighty perfect regulations and the imperfect or impossible implementation and supervision. In fact, there is a Golden Rule in the regulatory world: a regulation is only as good as the supervision that ensures that it is applied consistently.

The false dilemma

Having said this, it is striking to see how some policymakers and regulators are responding to the new EU Commission push on simplification. Using the Global Financial Crisis as a shield (“we cannot let this happen again”: of course, we all agree with that!), many of them are stating that “simplification does not mean deregulation.” Well, that is an oxymoron that presents a false dilemma: “either we leave everything untouched or we will face again another massive financial crisis.” There is no inevitable tradeoff between financial stability and simplification. And if properly done, simplification could indeed support financial stability.

In fact, in the case of banks the strengths of the current regulatory framework are related to a few, extremely relevant elements of it: the capital ratios, much higher and fulfilled even by higher quality capital, liquidity ratios, reinforced capital for those parts of the balance sheet that are more volatile in nature (the trading book), a capital requirement that is more robust and does not depend on risk estimation (the leverage ratio), a pillar two that obliges to a holistic review of risks, both current and potential (the stress tests), a recovery and resolution regime that ensures that firms are better prepared to deal with extreme crisis situations, etc. I have never heard any lobby asking for an elimination of all (or, in fact, of any of) these new elements introduced since the Global Financial Crisis.

And turning to the weaknesses, these come from three sources, new technical developments, the impact of capital arbitrage in the structure of financial markets, and the distraction provoked both on firms and supervisors by the complex regulatory framework. On the technical developments, all the impact of the IT revolution on banks and the financial system is evident but poorly understood, given its widespread influence. Regarding capital arbitrage, the increased requirements on regulated banks has shifted risk taking to areas such as the shadow banking sector (or private lending), creating interdependencies not well understood. Finally, on the distraction side, the recent US regional bank crisis was a striking reminder that proper management of some plain vanilla risks (such as interest rate risk in the banking book) continue to be of the essence, especially in volatile markets.

The bad news: it is easier said than done

Accepting that the current regulatory framework has become too complex and difficult to implement is one thing, but identifying the areas where simplification can take place whilst respecting the financial stability objectives of regulations is far more complicated. In fact, this is a direct result of complexity: confronted with a tangle of twisted cables, it is very delicate to detect those cables that can be cut without any side effects.

The conclusion is clear. If the process of simplification is to be taken seriously, there needs to be a well-thought-out process of review of current regulation, consulting obviously with the main stakeholders, backed by a strong political will. High level declarations in either direction will ensure the project fails. On the contrary, a well-structured process, most probably a multiyear process, will be of the essence. That process must contain the priorities (the areas to be reviewed) as well as the deliverables over time. In other words, just as the review of financial regulation post the GFC was the result of a well thought plan that delivered results over a decade, the simplification package needs the same level of structured commitments.

The good news: there is a lot to choose from

Although the process of simplification cannot be simple (quite a contradiction, I know), the good news is that there is plenty of material to start with. A simple cost benefit analysis, that also factors in the global regulatory winds (especially in the US), should identify the priorities for the launch of the exercise. Of course, due process should be respected and stakeholders should be involved at an early stage.

The first step in the process must be to engage with the industry, particularly the financial industry, to identify areas of specific difficulty. Without an early involvement of those dealing with the practical implementation of regulation, any project will fail.

Supervisors have also a role to play, since they are also in charge of the practical application of financial regulations (or, to be precise, regulations such as DORA or ESG that have a meaningful impact on the financial industry).

Finally, at a later stage, when the process is well matured, the rest of stakeholders (financial services users, for instance) can be incorporated in parallel with the political discussions in the Council and Parliament.

Beware of Member States

Although the process must be led by the European Commission, it would be totally unfair, misleading, and dangerous for the success of the process to believe that the sole source of complexity is Brussels. On the contrary, Member States have played a big role, al least through two avenues. First, by adding complexity to the European Commission proposals. For instance, the Resolution package increase its length by 60% after a new version was agreed with Member States: national specificities do add complexities. Second, within MS, gold-plating increases the difficulty of application of EU rules. In other words, the lack of pan European bank mergers cannot be explained by the Brussels rules, but rather by Member States barriers that add complexity, either de iure or de facto.

The political semantics are fine as long as we do not take them too far

The simplification process should also consider legitimate interests and preoccupations. For instance, the oxymoron “simplification does not mean deregulation“ should be interpreted as a call for the main objectives of the post GFC regulation to be preserved. No one wants another GFC, for sure.

Having said this, to maintain that all of the regulation we have seen flowing in the last decades is not having any side effects seems unattainable. The emergence of the shadow banking sector, the retreat of public companies and IPOs, the growth and increasing importance of private equity, hedge funds and other less heavily regulated institutions should be seen as an indication of the need to review the burden of regulation on the financial system.

Conclusion

The World is becoming a weird place, and political (including geopolitical) forces not seen in decades are changing the reality we are confronted with. But if Europe is to survive in the New (Ab)Normal, it must think what the right thing to do is for its firms, and for its consumers. It is about the Single Market, as always, but we need a plan. And that plan must include a well-thought-out chapter around simplification and, yes, deregulation.