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 Insights
News

BCBS Finds Liquidity Risk Management Principles Remain Fit for Purpose

BCBS completed a review of its 2008 Principles for sound liquidity risk management and supervision. The review confirmed that the principles remain fit for purpose.

January 17, 2019 WebPage Regulatory News
News

HKMA Urges Local Banks to Start Working on FRTB Implementation

HKMA announced that it plans to issue a consultation paper on the new market risk standard in the second quarter of 2019.

January 17, 2019 WebPage Regulatory News
News

EBA Finalizes Guidelines for High-Risk Exposures Under CRR

EBA published the final guidelines on the specification of types of exposures to be associated with high risk under the Capital Requirements Regulation (CRR). The guidelines are intended to facilitate a higher degree of comparability in terms of the current practices in identifying high-risk exposures.

January 17, 2019 WebPage Regulatory News
News

MAS Guidelines on Risk Mitigation Requirements for OTC Derivatives

MAS published guidelines on risk mitigation requirements for non-centrally cleared over-the-counter (OTC) derivatives contracts.

January 17, 2019 WebPage Regulatory News
News

BoE Publishes the Schedule for Statistical Reporting for 2019

BoE published the updated schedule for statistical reporting for 2019. The reporting institutions use the online statistical data application (OSCA) to submit statistical data to BoE.

January 16, 2019 WebPage Regulatory News
News

PRA Delays Final Direction on Reporting of Private Securitizations

PRA and FCA have delayed the issuance of final direction, including the final template, on reporting of private securitizations, from January 15, 2019 to the end of January 2019.

January 15, 2019 WebPage Regulatory News
News

SNB Updates Forms on Supervisory Reporting for Banks

SNB published Version 1.7 of reporting forms (AUR_U, AUR_UEA, AUR_UES, AURH_U, AUR_K, AUR_KEA, and AURH_K) and the related documentation for supervisory reporting on an individual and consolidated basis.

January 15, 2019 WebPage Regulatory News
News

BCBS Finalizes Market Risk Capital Framework and Work Program for 2019

BCBS published the final framework for market risk capital requirements and its work program for 2019. Also published was an explanatory note to provide a non-technical description of the overall market risk framework, the changes that have been incorporated into in this version of the framework and impact of the framework.

January 14, 2019 WebPage Regulatory News
News

EBA Single Rulebook Q&A: First Update for January 2019

EBA published answers to 13 questions under the Single Rulebook question and answer (Q&A) updates for this week.

January 11, 2019 WebPage Regulatory News
News

PRA Proposes to Amend Supervisory Statement on Credit Risk Mitigation

PRA published the consultation paper CP1/19 that is proposing changes to the supervisory statement (SS17/13) on credit risk mitigation.

January 10, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 2473