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The costs of removing red tape include a lower chance of detecting recession-generating flaws in the financial system. What we call independent dimensions of regulation ( IDRs) operate more or less independently from other groupings. If an IDR's optimality is unknown, it may be risky to remove. Uncertainty thus implies that (some) red tape - a small amount of overregulation - is justified, in contrast to the Brainard principle that uncertainty dictates less policy activism. The long-run Gross Domestic Product (GDP) benefit of a 1 per cent improvement in financial services productivity is 0.06 per cent in our computable general equilibrium model. These relatively modest gains reinforce our conclusion.
