General Information & Client Service
  • Americas: +1.212.553.1653
  • Asia: +852.3551.3077
  • China: +86.10.6319.6580
  • EMEA: +44.20.7772.5454
  • Japan: +81.3.5408.4100
Media Relations
  • New York: +1.212.553.0376
  • London: +44.20.7772.5456
  • Hong Kong: +852.3758.1350
  • Tokyo: +813.5408.4110
  • Sydney: +61.2.9270.8141
  • Mexico City: +001.888.779.5833
  • Buenos Aires: +0800.666.3506
  • São Paulo: +0800.891.2518
September 15, 2017

Danièle Nouy, Chair of the ECB Supervisory Board, spoke at the 33rd SUERF Colloquium in Helsinki. She discussed the regulatory arbitrage challenges facing regulators and supervisors and highlighted the importance of international supervisory cooperation to deal with this issue.

ECB’s ongoing targeted review of internal models at over 60 banks, including all eight of the globally significant banks supervised in the euro area, is an important step toward dealing with the challenge of regulatory arbitrage. Supervisors need to scrutinize what bankers do and examine individual transactions to see whether they might be an attempt to game the rules. Ms. Nouy discusses three types of regulatory arbitrage and how it can be dealt with:

Cross-Jurisdiction Arbitrage, which exploits differences in rules for banks from one country to another. In Europe, cross-jurisdiction arbitrage has become even more of an issue in the context of Brexit. Thus, harmonization of rules is a powerful tool when it comes to preventing cross-jurisdiction arbitrage. Transposing the Basel and European rules into national law is important in this context, thus making a case for further harmonizing the European rulebook. To that end, we should rely less on EU directives and more on EU regulations, which are directly applicable in all member states.

Cross-Framework Arbitrage, which arises because some parts of the financial sector, such as the shadow banking sector, are less regulated than the highly regulated banking sector. If banks shift exposures to shadow banks, they become vulnerable to what is known as “step-in risk,” which must be addressed. With this in mind, BCBS has made step-in risk part of its official work program and is working on guidelines for banks and supervisors. These guidelines contain a number of criteria that will help to assess step-in risks for individual banks and they propose measures aimed at helping banks to deal with such risks. The guidelines will not contain automatic Pillar 1 capital or liquidity add-ons. Instead, they will provide a list of potential measures that leverage existing tools. It will be up to the banks to choose the most appropriate measures, while supervisors will check and challenge the choices banks make.

Intra-Framework Arbitrage, in which rather than trying to exploit differences between two or more sets of rules, banks try to exploit loopholes within a single set of rules. Here, ECB is more concerned with closing loopholes rather than harmonizing rules and preventing the spillover of risks. One solution could be to change the rules in such a way that loopholes are closed. However, for this to be effective, regulators would first have to identify every loophole, which we all know is impossible. So it makes sense to also apply tools that have a broader and more preventive effect: such measures are already being implemented. The rules nowadays focus on more than one dimension. "Thanks to Basel III, banks around the world now face multiple constraints: the risk-weighted capital ratio has been supplemented by a leverage ratio and liquidity ratios. These constraints reinforce each other, which makes it much more difficult for banks to game them."

 

Related Link: Speech

Keywords: Europe, EU, Banking, Regulatory Arbitrage, Shadow Banking, Step-in Risk, Single Rulebook, ECB

Related Articles
News

APRA Proposes Changes to Credit Risk Management Standard for Banks

APRA is proposing to update its prudential standard on credit risk management requirements for authorized deposit-taking institutions.

March 25, 2019 WebPage Regulatory News
News

EIOPA Publishes Q&A on Regulations in March 2019

EIOPA updated questions and answers (Q&A) on the implementing and delegated regulations related to the Solvency II Directive.

March 25, 2019 WebPage Regulatory News
News

BCBS Issues Follow-Up Reports on Basel III Implementation Assessments

BCBS published a report summarizing the follow-up actions taken or planned by member jurisdictions as of the end of 2018; these actions are intended to address deviations from the Basel standards identified as part of the Regulatory Consistency Assessment Program (RCAP).

March 25, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: Fourth Update for March 2019

EBA published answers to five questions under the Single Rulebook question and answer (Q&A) updates for this week.

March 22, 2019 WebPage Regulatory News
News

ECB Updates Validation Checks and List of Identifiers Under AnaCredit

ECB updated the AnaCredit validation checks (Version 1.4) and the list of national identifiers (version 2.4) for AnaCredit reporting.

March 21, 2019 WebPage Regulatory News
News

BCBS Publishes Results of the Basel III Monitoring Exercise

BCBS published results of the Basel III monitoring exercise based on data as of June 30, 2018.

March 20, 2019 WebPage Regulatory News
News

EBA, FCA, and PRA Agree on MoU Template for Supervisory Cooperation

EBA, FCA, and PRA announced that they have agreed on a template for the Memorandum of Understanding (MoU) that sets out the expectations for supervisory cooperation and information-sharing arrangements between UK and EU/European Economic Area national authorities.

March 20, 2019 WebPage Regulatory News
News

HKMA Publishes CoP on Loss-Absorbing Capacity Requirements of Banks

HKMA issued, in relation to the Financial Institutions Resolution (Loss-Absorbing Capacity Requirements—Banking Sector) Rules (LAC Rules) a chapter of a code of practice (LAC CoP) under section 196 of the Financial Institutions Resolution Ordinance (FIRO).

March 20, 2019 WebPage Regulatory News
News

EBA Publishes Reports Monitoring the Implementation of Basel III in EU

EBA published two reports measuring the impact of implementing the final Basel III reforms and monitoring the implementation of liquidity measures in EU.

March 20, 2019 WebPage Regulatory News
News

BCBS Publishes Results of Survey on Proportionality in Bank Regulation

BCBS published a report presenting the results of a survey conducted on proportionality practices in bank regulation and supervision.

March 19, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2786