The Case for Targeted Deregulation of Finance

In my recent work, I make the case for targeted deregulation of finance. 

In Europe and the US, deregulatory agendas have dominated the last years’ political debate. In the EU, the shift toward deregulation began with EU Commission President von der Leyen’s commitment in March 2023 to reduce administrative and reporting burdens and the outcome of the European Parliament elections in June 2024. Former ECB Chair Mario Draghi’s influential report advocated enhanced competitiveness through regulatory simplification. In early 2025, the European Commission released its ‘Competitiveness Compass’ and established a new Commissioner for Implementation and Simplification.

Financial deregulation has become central to this agenda. The European Commission released its ‘simplification omnibus packages’ in February 2025 (which was adopted in October 2025) to: target the complexity of the EU Sustainable Finance Framework; examine whether increased supervision at the EU level could enhance regulatory simplification and burden reduction (SBR); and task the European Supervisory Authorities (ESAs) to large-scale reviews of EU financial legislation to identify potential simplification and burden reduction.

While labelled as simplification to avoid conflict with EU long-term policy commitments, the EU agenda in finance aims in many aspects at deregulation in substance. Simplification, taken literally, can include an outright ban where to-the-point regulation is difficult and complex—a strategy pursued by European financial regulators before. However, outright prohibition of successful international business models rarely enhances EU competitiveness. Simplification is the political term for deregulating business-hostile rules in EU finance. This trend has been accelerated by pro-bank advocates who are concerned about European banks falling behind their American and Asian counterparts, which face less stringent regulation. In this sense, EU Commissioner Albuquerque lists only deregulatory measures in her first-year progress report.

We see similar tendencies elsewhere: In the UK, following the outcome of the US elections, the current UK Chancellor of the Exchequer unexpectedly endorsed the claim by leading bankers that financial regulators went too far in their efforts to protect consumers, investors, and depositors. 

Indeed, deregulation cycles are not new in finance. ‘Better regulation’ initiatives, the UK’s Big Bang in 1986, and several deregulatory measures adopted prior to the onset of the Global Financial Crisis 2007-08 have all been characterised as forms of deregulation. 

Deregulation has also been studied extensively. One severe type, ‘structural deregulation’, involves deliberate limitation of the state’s administrative capacities. Recent examples include the agenda of the current US administration for the Department of Government Efficiency (DOGE) and the longest shutdown of US public services in the history of the United States. Another type, ‘midnight deregulation’, refers to deregulation reforms introduced in the final months of an administration before elections. 

In finance, deregulation has been associated with increased competition in credit and financial markets, as well as changes in environmental outcomes, mortality rates, and reporting practices of financial intermediaries. More broadly, deregulation has been situated in a recurring cycle: liberalisation promotes economic expansion, leading to crises and eventually to renewed regulation. Finally, deregulation has been studied in terms of regulatory competitiveness, where regulators compete to attract financial institutions. 

In my view, none of these approaches adequately describe the attitude that regulators should take towards deregulation of finance. Deregulation of finance should neither be part of a political powerplay nor come in cycles following periods of over-strictness and regulatory interventions. 

The purpose of financial regulation is to benefit society and regulated financial institutions. If the benefits generated by a particular rule do not outweigh its costs, there is a case for deregulation. However, bounded regulatory rationality and political influence have undermined the consistent application of this undisputed principle. As a result, regulators’ mandates have gradually expanded such that financial regulation today often addresses matters beyond finance. This has made cost-benefit analysis more difficult and has, in turn, weakened regulatory accountability and acceptance of rules by regulated entities. 

In turn, I argue that targeted deregulation in finance is both appropriate and desirable as it strengthens the implementation of accepted regulatory objectives. Targeted deregulation is part of any due regulatory process: just as enterprises must regularly optimise their operations, financial regulators should regularly optimise their regulatory framework. Targeted deregulation is utterly distinct from Roberta Romano’s ‘iron rule of financial regulation’ which is that crises drive regulation, and in turn the polity must curtail regulatory overreach from time to time in deregulation cycles. 

To foster targeted deregulation, I suggest five principles: regulators should position themselves as benevolent parents of financial systems; avoid ambiguous regulatory language; accept regulatory competition; adopt ‘sandbox thinking’; and favour proportionate risk-based approaches over outright prohibition.

The full paper can be accessed here.

Dirk Zetzsche is the Head of the Department of Law, Full Professor in Financial Law, and ADA Chair in Financial Law and Inclusive Finance at the University of Luxembourg.