The Complexity Of Clarity: Why Banking Needs More Than Simple Rules

In the wake of financial crises and recurring calls for reform, policymakers and industry voices alike have frequently championed the simplification of bank regulations. The argument is intuitive and politically appealing: less red tape, clearer guidance, and more manageable compliance. But beneath this well-meaning drive lies a paradox. Simplifying regulatory frameworks in pursuit of clarity can in fact undermine financial stability—particularly when simplification translates into a shallow understanding of risk or inadequate oversight of complex institutions.

Modern banking is not simple. And regulation that pretends otherwise can do more harm than good.

The Allure of Simplification

The push for simplification stems from a set of practical frustrations. Smaller banks often cite burdensome compliance costs and opaque rulebooks as barriers to growth. Supervisors complain of interpretive inconsistencies. Politicians argue that complex regulations stifle innovation and reduce competition. In response, regulatory agencies periodically attempt to trim excess, replace technical jargon with plain language, and introduce threshold-based exemptions intended to reduce friction for low-risk institutions.

In theory, these moves promote transparency, foster efficiency, and make enforcement easier. Simpler rules should, in principle, reduce ambiguity and help financial institutions understand and meet their obligations more effectively.

But the modern financial system does not lend itself to simplicity.

The Irreducible Complexity of Modern Banking

Contemporary banking is structurally complex. Today’s institutions operate across multiple jurisdictions, engage in high-frequency trading, deploy algorithmic decision-making, and structure products that span derivatives, securitisation, and synthetic exposures. Many maintain off-balance-sheet vehicles and counterparty exposures that shift daily.

This level of complexity is not decorative—it is foundational. Global capital flows, layered interbank relationships, and evolving technology stacks mean that financial institutions are deeply interconnected. Risks materialise not only from isolated bad bets, but from feedback loops, liquidity mismatches, and cascading failures.

Any regulatory framework that oversimplifies the underlying mechanics of banking—whether by compressing risk models, standardising capital requirements, or reducing reporting obligations—risks leaving critical exposures unexamined.

When Simplification Backfires

History offers clear warnings. In the early 2000s, the global shift toward risk-weighted capital under Basel II was seen as a technical improvement. But it also enabled banks to hold minimal capital against off-balance-sheet assets that later proved toxic during the 2008 crisis. The regulatory framework, though theoretically elegant, failed to account for the complexity and opacity of structured credit markets.

Similarly, the repeal of key provisions under the Glass-Steagall Act in the US removed firewalls between commercial and investment banking, in part under the logic that such boundaries were outdated. The result was a financial sector that grew in scale, interconnectedness, and opacity, ultimately requiring systemic bailouts when it failed.

These episodes illustrate how simplifying regulation, without understanding what is being discarded, creates new vulnerabilities. The desire for clarity cannot come at the expense of necessary complexity.

Clarity Without Complacency

The critical distinction is between clarity and minimalism. Financial regulation should be clear in language, purpose, and implementation—but not simplistic in content. Rules must be designed to match the complexity of the institutions and systems they govern.

Too often, simplification efforts pursue elegance over effectiveness. In doing so, they encourage false confidence. When institutions believe the rules are simple and risks are fully captured, there is less incentive to probe the unknown or model tail events. The result is complacency, not safety.

A Smarter Path: Complexity Managed, Not Eliminated

This does not mean regulation must be impenetrable. The goal should be intelligent complexity—a structure that mirrors the reality of financial systems, while remaining understandable and proportionate.

This can be achieved through:

• Hybrid approaches that combine rules-based structures with principles-based oversight, offering both specificity and flexibility.

• Proportionality, where regulatory obligations scale based on an institution’s size, complexity, and risk profile.

• Regulatory technology (RegTech), enabling automation and data-driven supervision to reduce manual burdens without sacrificing insight.

These approaches respect the necessity of complex regulation while reducing unnecessary administrative overhead.

Policy Recommendations

For regulators and policymakers, the path forward requires caution and balance:

• Prioritize clarity in communication, not in the number or scope of rules.

• Recognize that simplification is not neutrality—it can favor certain institutions or risk types.

• Reassess regulatory frameworks not by how short they are, but by how effectively they capture systemic risk.

Periodic review is essential, but revisions must be grounded in operational understanding, not political expediency.

Conclusion: Complexity is Not the Enemy

Calls to simplify banking regulations will persist—and in many cases, they will be well-intentioned. But clarity must not be conflated with shallowness. The real challenge is not how to eliminate complexity from regulation, but how to harness it—translating the intricacies of modern finance into frameworks that are both effective and enforceable.

Banking is complex. Its regulation should be no less so.

Author: Ricardo Goulart