Regulatory easing and the risk of financial misconduct

Financial regulation is inherently reactive and pro-cyclical, with each pivot in political priorities setting the stage for the next cycle. As regulatory easing modifies the decision environment within firms, internal discipline should be seen as more rather than less important, writes Prof Peter Szilagy.

In the years leading up to recent major financial scandals, the warning signs were visible long before the scandals broke. Allegations of LIBOR manipulation first started with a 2008 Wall Street Journal article, [1] but banks' incentives for biased rate submissions had been widely understood years earlier. [2] The foreign exchange manipulation scandal entered the public domain in 2013 following reporting by Bloomberg, [3] but concerns about banks' attempts to influence FX fixings had been discussed as early as 2006. [4] The cum-ex files investigation on the ongoing dividend tax arbitrage scandals - with cumulative tax losses estimated at up to €150 billion between 2000 and 2020 - began in 2018, [5] but whistleblowers had warned of procedural loopholes in Germany as early as 1992. [6]