“Crises don't repeat.” Danielsson advocated for deregulation and diversification of the financial system to reduce the cost of intermediation and enhance stability. He argued that “one-third of intermediation in the United States is done by banks, and that makes the cost of intermediation lower and easier for the United States to safeguard the system. Europe is 90%+.” He is concerned that Basel 3 forces banks and other stakeholders to see risk and the world the same way and then react likewise in times of stress.

Winning combination

Interestingly, Danielsson suggested that banks with new business models should be regulated differently from existing company incumbents. Consequently, he thinks that a more diversified system benefits the system as “the cost of intermediation goes down, growth goes up and the chance for systemic crisis goes down. A win-win-win.”

Danielsson controversially stated that economic growth, driven by deregulation and diversification, is the best way to reduce systemic risk.

More or less regulation? A legitimate discussion

However, Nicolas Veron, senior fellow at Bruegel and at the Peterson Institute for International Economics, strongly disagreed with Danielsson's implied suggestion of lowering capital requirements for banks, stressing that proper capital levels are crucial for banking system resilience. He remarked that the US has a much better diversified financial system than Europe, yet “we saw the Silicon Valley Bank episode, which was extremely educational.”

John Berrigan, director general for financial stability, financial services and the capital markets union at the European Commission, cautioned against the idea of simply deregulating, emphasising the need to understand the trade-offs between regulation and economic growth. “Financial stability must not be the stability of a graveyard,” he said, reporting the words of Lord Hill, commissioner for financial stability between 2014 and 2016. However, Berrigan is concerned that the long period of economic underperformance in Europe could become a threat to the stability of the system.

“There is a sense out there that simplification is all about removing total redundancies from the regulation, that we have a lot of regulation full of redundancies that have absolutely no function, but most things in regulation have been put there for some purpose,” stressed Berrigan. One must be clear and understand the tradeoffs.

Berrigan noted the pressure to restart a discussion on growth and competitiveness. He is concerned that starting a process resulting in a deregulation may ultimately set us up for the next financial crisis. “We promised in 2008-09 that we would not do that. I think we should stick to that promise.”

Cornelia Holthausen, director general, macroprudential policy and financial stability at the European Central Bank, noted the need for banks to be competitive on the global stage given the tendencies to deregulate in the US, yet “systemic risks are increasing in ways that we did not foresee just a year ago.”

A case in point: macroprudential policymaking

Berrigan also pointed out challenges in macroprudential policymaking within the EU due to the co-existence of European and national decision-making. He explained that it has been decentralised, because the euro area single monetary policy could not respond to the national specific features of any one economy. “It's an average.” Consequently, the macro potential was made “member state-ish,” to allow them to compensate for what monetary policy might not be able to do. He doubts whether it can be fully centralised because there are still issues that a single monetary policy may not be suitable for any one of the member states.

Veron questioned whether these issues should be decided at the state level. “Isn’t [the ECB] best placed to make those kinds of decisions in a neutral, non-political way, with due consideration, consultation, information, and listening to the member states?” He noted, for instance, that member states apply countercyclical buffers “for reasons that have little to do with their fight against the financial cycle.”