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Hedge Fund Regulation Via Basel III

Wulf A. Kaal

University of St. Thomas, Minnesota - School of Law; European Corporate Governance Institute (ECGI)

April 9, 2011

Vanderbilt Journal of Transnational Law, Vol. 44, p. 389, 2011

This Article is a rejoinder to a comment by Professor Romano on an earlier paper I coauthored with Christian Kirchner. Professor Romano suggests regulatory arbitrage, rather than the targeted regulation of bank lending to hedge funds under Basel III, as a hedge against systemic failure. I contend that it was not harmonization through Basel II but rather the profitability of certain assets and business strategies that caused banks to hold similar assets and engage in similar strategies. In particular, I find that the increasing role of hedge funds in the credit derivatives market, in combination with the market’s recent failure, suggests that an increased emphasis on banks’ lending exposure to hedge funds could be justified. Using the methodological approach of New Institutional Economics, I evaluate recent regulatory changes, including the U.S. Dodd-Frank Act, the AIFM Directive, and other pertinent regulation. I provide an impact analysis of regulatory changes, de lege lata and de lege ferenda, with a special emphasis on, and historical analysis of, hedge fund registration rules and asymmetric regulation in Dodd-Frank and the AIFM Directive.

Number of Pages in PDF File: 75

Keywords: Basel III, Hedge Funds, Institutional Economics, Moral Hazard, Systemic Risk, Credit Derivatives, Harmonization, Bank Regulation

JEL Classification: K22, G1, G2, G3, F3, B25

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Date posted: April 10, 2011  

Suggested Citation

Kaal , Wulf A., Hedge Fund Regulation Via Basel III (April 9, 2011). Vanderbilt Journal of Transnational Law, Vol. 44, p. 389, 2011. Available at SSRN: http://ssrn.com/abstract=1806252

Contact Information

Wulf A. Kaal (Contact Author)
University of St. Thomas, Minnesota - School of Law ( email )
MSL 400, 1000 La Salle Avenue
Minneapolis, MN Minnesota 55403-2005
United States

European Corporate Governance Institute (ECGI) ( email )
B-1050 Brussels
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