MILAN – Around the world, the debate about financial regulation is coming to a head. A host of arguments and proposals is in play, often competing with one another – and thus inciting public and political confusion.
One approach to financial re-regulation – supported by arguments of varying persuasiveness – is to limit the size and scope of financial institutions. Some claim that smaller entities can fail without impairing the system, thus sparing taxpayers the cost of a bailout. But if systemic risk emerges in ways that are not yet fully understood, smaller banks may all fail or become distressed simultaneously, damaging the real economy.