Kenneth Langone Professor of Finance, NYU Stern School of Business

Since the great financial crisis of 2008, governments have set new records in market intervention, re-regulation of banking and financial markets, and in prosecution of banks for mismanagement. The new regulations touch just about everything in finance and completely change the financial regulatory system. However, these regulations have been hastily prepared and contain flaws that suggest they may not be effective in addressing systemic risk in the future. They also impose enormous compliance costs on the banking industry, even though no more than about 40 banks worldwide are systemically important. The costs will be passed on to customers of banks and users of financial markets, which may detract significantly from future economic growth prospects. Banks will have to adapt their business models to the new circumstances of their industry, or surely be challenged by shareholders until they do. But the way the regulatory platform is structured now, they will be adapting toward a more conservative, risk-averse form of what they were before. That may mean that too-big-to-fail becomes too-cautious-to-fail. If we have reduced the banks’ capability to finance basic economic growth, a role that is equally important to our societies as systemic risk reduction, the regulatory response to the crisis may prove to be very mistaken. Risk has to be financed somewhere, if we are to return to the growth rates that we need to maintain and improve living standards. Most likely, the regulatory and other measures taken in response to the crisis will have to be modified in the future, but probably not in the near term.