The illusory sirens of deregulation

Deregulation or simplification? American hawks would like the former, European doves the latter. The economic analysis is all in favour of the doves, but the political incentives of the hawks, including members of the Fed, are very strong.

The best place to start is to borrow the words that Governor Fabio Panetta used in his latest Final Considerations to analyse what is happening: "With the new US administration taking office, a pro-deregulation orientation has emerged in the banking and financial sector.

In the United States, Trump's arrival in the White House marked the overbearing return of so-called deregulation. Deregulation imposed itself in the US - but not only there - as the dominant approach to financial rule design from the 1980s onwards, and was based on an axiom: markets tend to be efficient, the more each individual operator moves within a rule architecture that allows him to make the best use of his cognitive capacities, as he is in possession of the best available information assets. To put it in the consummate refrain: who better than the banker knows what it means to bank?

Hence, the ideal regulation - which was given the reassuring name of 'prudential' - became one for which it was sufficient to identify the appropriate capital and liquidity ratios. Thus traditional structural regulation was dismantled - which was, on the contrary, stigmatised with the appellation 'financial repression' - in order to build an architecture of rules that, in the words of Fed Chairman Alan Greenspan in 2002, was convinced had produced 'a much more efficient, and at the same time more resilient, financial system than the one that existed twenty-five years ago'. In short, every supervisor's dream came true: to create rules that produce both more efficiency and more stability.

The Great Financial Crisis that erupted in 2008 showed empirically that the dream was in fact an illusion, dangerous in that it was based on an erroneous axiom: it is not true that the banker's choices are always rational, just as it is not true that his information assets are always the best. Yet today deregulation is back. The reason is always the same: politicians and bureaucracies may have the incentive to use financial rules with short-term consensus in mind. Then, when the memory of a Great Crisis fades from people's minds, political and bureaucratic opportunism can more easily reappear on the scene. Hence, financial deregulation may once again be the watchword not only in the ranks of the Republican Party, but also in the words of the FED's own Michelle Bowman, the FED's new vice-president for supervision.