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How Special Are They? – Targeting Systemic Risk by Regulating Shadow Banking

Reshaping Markets. Economic Governance and Liberal Utopia 185-207 (Bertram Lomfeld, Alessandro Somma & Peer Zumbansen (eds.), Cambridge: Cambridge University Press, 2016)

SAFE Working Paper No. 68

22 Pages Posted: 6 Oct 2014 Last revised: 31 May 2016

Tobias H. Troeger

Goethe University Frankfurt - Faculty of Law; Goethe University Frankfurt - Research Center SAFE; European Banking Institute

Date Written: October 5, 2014

Abstract

This essay argues that at least some of the financial stability concerns associated with shadow banking can be addressed by an approach to financial regulation that imports its functional foundations more vigorously into the interpretation and implementation of existing rules. It shows that the general policy goals of prudential banking regulation remain constant over time despite dramatic transformations in the financial and technological landscape. Moreover, these overarching policy goals also legitimize intervention in the shadow banking sector. On these grounds, this essay encourages a more normative construction of available rules that potentially limits both the scope for regulatory arbitrage and the need for ever more rapid updates and a constant increase in the complexity of the regulatory framework. By tying the regulatory treatment of financial innovation closely to existing prudential rules and their underlying policy rationales, the proposed approach potentially ends the socially wasteful race between hare and tortoise that signifies the relation between regulators and a highly dynamic industry. In doing so it does not generally hamper market participants’ efficient discoveries where disintermediation proves socially beneficial. Instead, it only weeds-out rent-seeking circumventions of existing rules and standards.

Keywords: shadow banking, regulatory arbitrage, prudential supervision

JEL Classification: G21, G28, H77, K22, K23, L22

Suggested Citation

Troeger, Tobias H., How Special Are They? – Targeting Systemic Risk by Regulating Shadow Banking (October 5, 2014). Reshaping Markets. Economic Governance and Liberal Utopia 185-207 (Bertram Lomfeld, Alessandro Somma & Peer Zumbansen (eds.), Cambridge: Cambridge University Press, 2016); SAFE Working Paper No. 68. Available at SSRN: https://ssrn.com/abstract=2505909 or http://dx.doi.org/10.2139/ssrn.2505909

Tobias Hans Tröger (Contact Author)

Goethe University Frankfurt - Faculty of Law ( email )

Grüneburgplatz 1 (Westend Campus)
Frankfurt, 60323
Germany
+49 69 798 34391 (Phone)
+49 69 798 34536 (Fax)

HOME PAGE: http://www.jura.uni-frankfurt.de/43940696/English-Version

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://safe-frankfurt.de/research/all-researchers/researchers-details/showauthor/prof-dr-tobias-troe

European Banking Institute ( email )

Frankfurt
Germany

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