Any reversal would call into question whether the lessons of the crisis have indeed been learnt – and thus whether financial integration can still be considered safe. Third, financial regulation interacts critically with monetary policy. Lax regulation implies an underestimation by regulators of incentives which lead to behaviour that is individually profitable, but socially costly.
Given the large collective costs that we have observed, there is never a good time for lax regulation. But there are times when it is especially inopportune. Specifically, when monetary policy is accommodative, lax regulation runs the risk of stoking financial imbalances.