Tighter regulation could cause next financial crisis, Goldman Sachs executive claims

28 January 2011

The introduction of tighter regulation to the banking industry could cause a future financial crisis rather than acting as a preventative, a banking executive has said.

Gary Cohn, Goldman Sachs’ most senior executive after chairman and chief executive officer Lloyd Blankfein, made the comments at the World Economic Forum, the Financial Times reported.

He told the newspaper that implementing stricter rules could result in greater risk being generated in banking areas where less supervision is in place.

“In the next few years, the unregulated sector will grow at an exponential rate. Risk is risk. My concern is that ... risk will move from the regulated, more transparent banking sector to a less regulated, more opaque sector,” Mr Cohn explained.

The banker added that if a second financial crisis arrives, then public money could be used to bail out unregulated firms which cannot afford to repay these funds.

His comments echo those of Peter Sands, Standard Chartered chief executive officer, who said at the event that increasing regulation for the banking sector will result in global economic growth being restrained.

However, Mark Coronna, managing director Europe at Wolters Kluwer Financial Services, said that there is cycle of behaviour between markets and the authorities.

He said that historically “market issues [have been] followed by regulatory reform as a response to those issues".

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