Deregulatory pressures to encourage competitiveness and growth: there is no such thing as a free lunch

This article was written in collaboration between our Forvis Mazars Economics Hub and Forvis Mazars Global Financial Services Regulatory Centre. 

In the aftermath of the 2008 Global Financial Crisis (GFC), stringent regulations were developed for the banking and insurance sector to prevent the need for future public bailouts during times of financial stress. Nearly two decades later, there is a growing sentiment among governments on both sides of the Atlantic towards deregulation, with the aim of striking a balance between safeguarding financial stability and fostering economic expansion.

This deregulatory trend is accelerating, especially with the signals coming from the new administration in the United States (US). Outgoing Federal Reserve Vice Chair for Supervision Michael Barr has advised against relaxing bank regulations and urged regulators to finalise the implementation of international capital standards, while at the same time the future of Basel III Endgame reforms in the United States remains uncertain. This uncertainty has also already influenced the United Kingdom (UK), where the Bank of England has postponed Basel 3.1 implementation to 2026, citing competitiveness concerns. Meanwhile, in the European Union (EU), the European Commission has delayed new market risk rules under CRD VI/CRR III by a year and is considering adjustments to capital requirements, reflecting growing concerns over global regulatory alignment and financial sector competitiveness.

In this article, George Lagarias, Chief Economist at Forvis Mazars, and Eric Cloutier, Group Head of Banking Regulations at Forvis Mazars, discuss the rise in governments’ focus on national economic growth and competitiveness, and the potential impacts on the deregulation agenda for the financial sector globally. Mr. Lagarias argues the trend currently observed may be the tail of the longer cycle which followed the global financial crisis. Conversely, Mr. Cloutier warns that a deregulatory  race-to-the-bottom could lead to a repeat of past financial crises.

“On one hand, deregulation can unlock credit, drive investment, and accelerate economic growth. On the other, history has shown that rapid deregulation often leads to excessive risk-taking, asset bubbles, and financial instability. The challenge is ensuring short-term gains don’t come at the cost of long-term resilience.”

George Lagarias, Chief Economist, Forvis Mazars in the UK

Regulatory expansions since the Global Financial Crisis

The 2008 crisis forced central banks and governments to significantly expand their balance sheets to address vulnerabilities in the financial system created by commercial and investment banks, which had been deregulating since the mid-1980s.

The international regulatory response to the GFC was to introduce a series of sweeping reforms to enhance financial stability, improve transparency, and prevent excessive risk-taking in the banking and insurance sectors.At the global level, the Basel III framework, developed by the Basel Committee on Banking Supervision, introduced stricter capital requirements, leverage constraints, and liquidity measures to strengthen financial resilience. Global accounting and regulatory standards also evolved to enhance financial institutions transparency and risk assessment.

In the U.S., the Dodd-Frank Act (2010) introduced the Volcker Rule to curb proprietary trading, created the Consumer Financial Protection Bureau (CFPB) as a retail banking and investment watchdog, and imposed stricter capital, liquidity, and stress-testing requirements.

In Europe, CRD III and CRD IV/CRR incorporated Basel 2.5 and Basel III into EU law, increasing capital and liquidity buffers. MiFID II enhanced market transparency, while the BRRD established a framework for resolving failing banks without taxpayer bailouts.

As a result, and to prevent future crisis, financial insitutions had to significantly increase their amounts of higher-quality regulatory capital (such as common equity) and were constrained in their involvement in high-risk investments, thereby shifting towards more traditional banking activities. Lower leverage ratios, typically measured as the ratio of a bank’s total assets to its equity, were implemented to ensure greater stability. Additionally, the loan-to-deposit ratio (LDR) was reduced to ensure banks maintained sufficient liquidity. Banks were also mandated to regularly conduct comprehensive stress tests on their portfolios to assess their ability to withstand economic shocks.

These regulatory expansions have significantly bolstered banks’ capital adequacy, to absorb losses during financial stress. Additionally, stringent liquidity requirements have enhanced banks’ resilience, enabling them to meet short-term obligations and maintain stability.

Regulators saw these results as successfully achieving their goals of ensuring financial stability.

Global debt surge continues unabated?

In a global economy challenged by demographic headwinds and technology falling short of delivering the productivity gains anticipated by the fourth industrial revolution, economic growth increasingly depended on borrowing, either through government debt or bank credit.

Following the banking crisis, global government debt escalated sharply. Part of this increase was associated with bailout costs, but most of it resulted from a significant decline in tax revenues following the crisis. Historically, debt increases by an average of 86% after a financial crisis[1]. Governments, under increased public scrutiny in the age of social media, were compelled to deliver growth at any cost. With banks restricted and private investors overwhelmingly focusing on the tech sector, other economic areas required government intervention through increased fiscal spending, facilitated by low interest rates.

Over the past 25 years, global total debt-to-GDP ratios ballooned from 220% to over 330%.[2] The US government debt-to-GDP ratio is projected to surpass 130% within the next decade, possibly even sooner[3]. In Europe, despite Germany’s recent decision to significantly increase its debt tolerance, debt creation remains constrained by the Stability and Growth Pact underpinning the common currency. This pattern of escalating global debt accumulation continues exponentially, with interest payments significantly rising post-pandemic, signalling the end of a two-decade low-inflation period.

When global debt becomes unsustainable

Government debt accumulation, in other words, is not sustainable. Governments have several options, but they are mostly painful.

They could attempt to inflate the debt away, although high inflation disproportionately impacts lower-income earners and can significantly depress demand, potentially triggering recessions.

Another route would be sharp currency depreciation, effectively a form of default. In a free exchange-rate environment, one country’s depreciation could prompt others to follow, leading to a global race toward currency debasement, from which no one would ultimately benefit, given significant interim macroeconomic volatility.

Debt defaults or debt swaps (swapping shorter for longer term debt) also remain viable options, but these typically carry prolonged lingering effects.

This presents governments with a relatively appealing option: substituting government debt with increased credit creation by the financial sector. Deregulation can be one method to quickly stimulate such lending, although it carries potential risks if not managed properly.

Deregulation in the present environment

Following the GFC, regulatory tightening was widely expected and implemented. While some in the financial sector anticipated eventual deregulation, stringent rules remained in place for over a decade before pressures to ease requirements gained momentum, particularly in the late 2010s. Only recently, with the change in administration in the United States, we have seen a very rapid deregulation pressures.

In the United States, the government recently introduced a broad range of measures towards a strong deregulation agenda, to focus on America First. It communicated, amongst others, its intentions to eliminate the Consumer Financial Protection Bureau. The important changes in leadership and new appointments at the Federal Reserve, at the Securities and Exchange Commission, and other regulatory agencies also all suggest a move toward lighter regulatory oversight.

The recent regulatory overhaul in the US under the new administration has cast uncertainty over the Basel III endgame reforms, potentially setting up the first direct confrontation between US regulators and the Basel Committee on Banking Supervision (the global banking supervision body). Michael Barr, who stepped down from his role as the US  Federal Reserve Vice Chair for Supervision in February 2025, has cautioned against any push to significantly weaken existing bank rules and supervision. He has urged regulators to complete the implementation of international capital standards, emphasising that strong regulations and capital requirements are essential to protect against unforeseen shocks. ​

Considering the importance of the US in the global financial ecosystem, this creates pressure on other regions. For example, Europe, including the UK and the EU, may feel the pressure to follow suit in order to avoid losing international competitiveness.

In the United Kingdom, the Labour government has already indicated that regulators should adopt a lighter, more pro-business stance to enhance the competitiveness of the financial sector. The Prudential Regulation Authority (PRA) recently announced a delay in its implementation of Basel 3.1 standards, moving the date to January 1, 2026, based on consultation feedback and monitoring of implementation timelines in other jurisdictions. It is too early to know if further amendments to the package will be made, but this is a clear indication of the prominence of the competitiveness and growth agenda in the UK.

In the EU, the competitiveness and growth agenda has gained significant traction, especially following the Draghi report, which has sparked extensive discussions within the EU institutions and financial sector. This is reflected at the national level, with central bankers in Spain, Italy, Germany, and France having recently suggested reducing banking regulation to enhance competitiveness. The European Commission has already delayed the implementation of new market risk rules under CRD VI/CRR III by one year, but no further anticipated changes to the package have been communicated. Other initiatives, such as recent pressures to simplify sustainability reporting – as evidenced by the Omnibus Package – also reflect increasing concerns about maintaining competitiveness in the EU.

For the time being, the discourse in Europe is more centred around enhancing regulatory efficiency and alleviating overly burdensome requirements on institutions rather than significant deregulation. EU regulators have been careful to underscore the importance of not trading the long-term resilience of the financial sector for medium-term growth objectives. For instance, European Central Bank (ECB) officials, including top supervisor Claudia Buch, have clearly warned against weakening Basel III standards.

However, we are faced with a rapidly evolving world, with significant pressures on the UK and the EU to further prioritise growth. It is very difficult to anticipate how this will translate for global financial sector deregulation in the coming years. For cross-border financial institutions, the risks of regulatory fragmentation and uncertainty are increasing significantly.

“While regulatory efficiency is important, a hasty rollback of safeguards could expose the financial sector to significant systemic risks, potentially undermining the stability gains achieved over the past decade.”

Eric Cloutier, Group Head of Banking Regulations/ Head of Global FS RegCentre, Forvis Mazars in the UK

The post-GFC world is over, but what does this mean?

We are clearly witnessing the twilight of the post-GFC regulatory environment. Deregulation, aimed at expanding credit and accelerating economic growth while easing pressure on government budgets, is now firmly underway.

Should this be a cause for concern? The answer is both yes and no.

The cycle of regulation and deregulation has repeated itself for nearly a century. Following the 1929 crash, financial markets became heavily regulated for six decades. The Glass-Steagall Act — a precursor to the Volcker Rule — barred commercial banks from engaging in investment activities, while the creation of the SEC in 1934 strengthened oversight. The US government took a highly interventionist stance, even appointing notorious stock speculator Joseph Kennedy (JFK’s father) to root out illegal market practices.

Deregulation gained momentum in the mid-1980s under Reagan and Thatcher, unlocking credit-driven growth. However, this process had a delayed effect. The full economic benefits were realised years later under Bill Clinton and Tony Blair, who reaped the rewards of policies set in motion nearly a decade earlier.

Yet, deregulation ultimately led to excesses. These actions can be seen as potential causes of banking crises in the US during the 1980s-1990s, such as the Savings and Loan (S&L) crisis, where deregulation led to speculative lending and financial collapse, and the New England Banking crisis, which allowed smaller banks to engage in risky lending practices. This ultimately culminated in the GFC, prompting a new wave of regulatory tightening.

Today’s policymakers appear intent on avoiding the slow-burning impact of past deregulation cycles. Unlike previous eras, where regulatory rollbacks took years to fuel growth, recent months have shown that governments – particularly driven by the US – are moving swiftly, aiming for immediate economic acceleration. This approach may not only lead to the deregulatory pressures for the banking and insurance sectors but may also result in loosening restrictions in sectors like energy, technology, and pharmaceuticals at an unprecedented pace.

Based on recent months’ observations, one can anticipate that the US administration may likely weaken regulatory and oversight bodies at a pace unseen in modern history, potentially forcing Europe to follow suit. Capital is already flowing to the US due to deeper markets and higher valuations, with investors favouring higher-yielding American risk assets. European markets, facing competitive pressures, cannot afford to cede further ground.

As with trade wars, we could soon witness a deregulatory race to the bottom, where global financial hubs compete to relax rules in pursuit of capital and economic expansion. The question is no longer whether deregulation is happening, but how far — and how fast — it will go.

Paving the way for faster growth?

On one hand, deregulation could drive a meaningful short- to medium-term acceleration in economic growth.

Financial institutions, contrary to governments, are typically more efficient at allocating capital to businesses. While government borrowing is often directed toward plugging gaps in areas such as healthcare and pensions — critical for an aging population — financial institutions channel credit into profitable enterprises, fostering investment and innovation. This shift could support a healthier economic model, where governments remain mindful of social safety nets while reducing excessive borrowing.

If artificial intelligence (AI) and the Fourth Industrial Revolution deliver the expected productivity gains, this economic momentum could become more sustainable, reinforcing long-term growth rather than creating another credit-fuelled boom-and-bust cycle.

A significant risk buildup downside

There is however no such thing as a free lunch. While deregulation may fuel economic growth, it also heightens financial risks.

Developed economies are as vulnerable, if not more, than emerging markets when it comes to banking crises, largely due to their reliance on credit. Historical patterns suggest a strong link between deregulation and financial instability. Learning from past US experiences, Reagan’s deregulatory push eventually contributed to the Global Financial Crisis two decades later. One can argue that the recent years’ easing of rules for US regional banks was followed by the 2023 banking crisis, with the collapse of banks such as Silicon Valley Bank, Silvergate Bank, and Signature Bank. On average, it takes five years between the completion of a major deregulation cycle and the onset of a banking crisis.

At its simplest, a banking crisis can be managed through central bank intervention. Today, central banks have more tools than ever, acting as lenders of last resort and rapidly expanding liquidity through Quantitative Easing (QE). However, suppressing interest rates for too long can lead to severe asset misallocations and ultimately depress long-term growth. The feasibility of repeating the 2009–2022 QE cycle is also questionable, given persistent inflation pressures.

Yet, the biggest risk is not inflation or economic distortions. It is the compounding of unknown risks.

When deregulation happens too quickly across multiple sectors, risks tend to merge and create new forms of financial instability that regulators and governments are often unprepared to handle.

What should financial institutions and business do in this regulatory uncertainty?

Ignoring the short-term benefits of deregulation would be a mistake. However, it is crucial to implement such changes in a controlled and limited manner to moderate potential negative consequence.

Starting with the optimistic perspective. Small and medium enterprises (SMEs) may gain easier access to funding, while rising demand could prompt businesses to expand. From a wealth management perspective, targeted deregulation could unlock further market gains by reducing compliance costs and increasing access to capital, ultimately leading to portfolio gains. In M&A, stronger growth conditions could push up acquisition premiums for non-tech companies. The competitive landscape may also shift, making it harder for dominant firms to buy out competitors at low valuations. With banks reinvesting in riskier assets, IPO activity could surge, and counterintuitively, internal rates of return (IRRs) may improve as earnings grow.

On the downside, risk managers for the financial sector will face the greatest challenge. Rapid deregulation significantly increases the likelihood of financial “Black Swan” events. Borrowers over-leveraging or expanding too quickly based on weak business plans could lead to corporate failures. Financial institutions must remain vigilant of rising credit risks in such an environment.  

While history suggests a five-year window between deregulation and crisis, today’s fast-moving financial environment could shorten that timeline. It will be essential to carefully balance the opportunities that deregulation will bring for financial institutions with remaining acutely aware of rising risks — leveraging growth without falling into complacency.

We are entering a very different financial sector environment; navigating the growth agenda with prudence will be essential for both governments and financial institutions.

“As deregulation pressures accelerate, financial institutions must strike a careful balance—seizing growth opportunities while maintaining resilience against emerging risks. Navigating this shift with foresight will be critical to long-term stability.“

Gregory Marchat, Group Head of Financial Services Advisory, Forvis Mazars in the UK

[1]“This Time is Different: Eight Centuries of Financial Folly”, Reinhart and Rogoff, 2011; [2] International Institute of Finance; [3] IMF