Abstract
Tighter regulation inevitably carries a cost, but must be weighed against the benefits of greater financial stability. Estimating net benefits is, however, a complex exercise and while consensus is that in aggregate these remain positive, gains could be made by improving efficiency and addressing leakages. Moreover, structural reform, and not least completing the European Banking and Capital Markets Unions, would do much to alleviate downside risks and lift growth. History teaches that ensuring economic prosperity and financial stability over time requires more than a set of regulatory safety margins. The revival of macroprudential regulation aims to address past errors with a flexible and forward-looking approach. These tools are still largely untested and at risk of unintended costs. Overall optimisation of the net benefits from regulation requires an iterative and co-ordinated approach. The potentially most damaging costs stem from regulatory protectionism. Recent trends are worrying and could, if confirmed, also forewarn of a less co-ordinated G20 response to the next crisis.
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