Less Really Can be More: Why Simplicity & Comparability Should be Regulatory Objectives

Abstract

Regulatory complexity undermined efforts to strengthen financial stability before the crisis. Nonetheless, post-crisis reforms have greatly exacerbated regulatory complexity. Using the example of capital regulation, this paper shows how complexity has grown geometrically from the introduction of the Basel Accord on Capital Adequacy in 1988 to the introduction of Basel III and the total loss-absorbing capacity (TLAC) proposal in 2015. Analysis of the current welter of required capital ratios leads to a proposal to eliminate 75 % of them without jeopardizing the safety and soundness of the system. Quite possibly, regulators might argue that one or more of these deleted ratios does make an important incremental contribution to the safety and soundness of the system. But these important debates are not taking place in public, in part because we lack systematic measures of the costs of regulatory compliance and effective sunset laws that would require that regulations meet a rigorous cost-benefit test periodically. The concluding section poses the more speculative question of why, despite the evident advantages of a simpler, more transparent regulatory system, the authorities layer on ever more complexity.