Financial Stability, New Macro Prudential Arrangements and Shadow Banking: Regulatory Arbitrage and Stringent Basel III Regulations

Abstract:     
Despite Basel III’s efforts to address capital and liquidity requirements, will the risks linked to regulatory arbitrage increase as a result of Basel III’s more stringent capital and liquidity rules?

As well as Basel III reforms which are geared towards greater facilitation of financial stability on a macro prudential basis, further efforts and initiatives aimed at mitigating systemic risks – hence fostering financial stability, have been promulgated through the establishment of the De Larosiere Group, the European Systemic Risk Board, and a working group comprising of “international standard setters and authorities responsible for the translation of G20 commitments into standards.”

This paper aims to investigate the impact of Basel III on shadow banking and its facilitation of regulatory arbitrage as well as consider the response of various jurisdictions and standard setting bodies to aims and initiatives aimed at improving their macro prudential frameworks. Furthermore, it will also aim to illustrate why immense work is still required at European level – as regards efforts to address systemic risks on a macro prudential basis. This being the case even though significant efforts and steps have been taken to address the macro prudential framework. In so doing, the paper will also attempt to address how coordination within the macro prudential framework – as well as between micro and macro prudential supervision could be enhanced.

Number of Pages in PDF File: 27

Keywords: counter party risks, liquidity, European Systemic Risk Board, stability, systemic risk, shadow banking, central banks, regulatory arbitrage, OTC derivatives, European Central Bank, supervision, coordination

working papers series