Policymakers Warn Europe Must Resist Easing Bank Regulation

Key Takeaways

• Lagarde’s Call to Action: ECB President Christine Lagarde urged policymakers to “level up” rules for non-banks rather than easing standards for banks.
• Bailey’s Warning: Bank of England Governor Andrew Bailey said deregulation risks repeating the mistakes of past crises as memories fade.
• Schnabel’s Concern: ECB board member Isabel Schnabel cautioned against a “race to the bottom,” highlighting risks from non-banks and stablecoins.
• Room for Simplification: Bailey backed simpler capital rules for smaller banks but rejected broad deregulation as the solution.

Deep Dive

Europe’s top central bankers are sounding the alarm that now is not the time to go soft on bank regulation. At a gathering in Amsterdam, officials from the European Central Bank and the Bank of England pushed back on calls to cut red tape, warning that rolling back rules could sow the seeds of the next crisis, Reuters first reported.

ECB President Christine Lagarde said the real imbalance lies not in banks being overburdened, but in non-banks enjoying a far lighter regime. Investment funds, insurers, and hedge funds have expanded their market share under looser oversight, creating what Lagarde described as an uneven playing field.

“Policymakers should do so not by lowering standards for banks, but by leveling them up for non-banks that are involved in bank-like activities, or with significant links to the banking sector,” she said.

The concern is that in a crisis, non-banks could still find themselves leaning on central banks for liquidity, given how intertwined they are with the rest of the system.

Bailey Warns Against Fading Memories

Bank of England Governor Andrew Bailey added his own cautionary note, saying history risks repeating itself if regulation is pared back as the lessons of 2008 fade. His remarks come as Britain’s finance minister Rachel Reeves presses ahead with her “Leeds Reforms,” designed to scale back financial sector rules in the name of boosting growth.

“There is ... a growing risk that because of this, as the pro-cyclical tide turns, we are inhibited from collecting necessary data in new areas of risk,” Bailey said.

He dismissed the idea that tougher rules on banks were behind Britain’s investment malaise, but did argue for a simpler capital regime for smaller deposit-takers, what he called a “Strong and Simple” approach.

Watch the New Frontiers of Risk

ECB board member Isabel Schnabel warned that loosening rules could fuel instability, urging regulators to focus on emerging vulnerabilities like non-banks and stablecoins. She described stablecoins as “the most important digital development in recent years,” but one that has created risky new connections between banks, crypto markets, and traditional finance.

Stablecoins, she said, combine money-like liabilities with reserves that may prove illiquid during stress, a dangerous mix if markets seize up.

“Rather than softening bank regulation, we should make sure that those areas of the financial system that pose new risks to the economy and banks, such as non-banks or stablecoins, are regulated appropriately without stifling innovation,” she said.

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