It’s the Tail-Risk, Stupid!

29 Pages Posted: 8 Oct 2019

See all articles by Matthias Thiemann

Matthias Thiemann

Goethe University Frankfurt

Tobias H. Troeger

Leibniz Institute for Financial Research SAFE; European Corporate Governance Institute (ECGI); European Banking Institute

Date Written: October 7, 2019


The use of contractual engineering to create channels of credit intermediation outside of the realm of banking regulation has been a recurring activity in Western financial systems over the last 50 years. After the financial crisis of 2007 and 2008, this phenomenon, at that time commonly referred to as ‘shadow banking’, evoked a large-scale regulatory backlash, including several specific regulatory constraints being placed on non-bank financial institutions (NBFI). This paper proposes a different avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation. Rather than engaging in the proverbial race between hare and hedgehog that is emerging with increasingly specific regulation of particular contractual arrangements, this paper argues for a normative approach to supervision. We outline this approach in detail by showing that regulators should primarily analyse the allocation of tail risk inherent in the respective contractual arrangements. Our paper proposes to assign regulatory burdens equivalent to prudential banking regulation, in case these arrangements become only viable through indirect or direct access to an (ad hoc) public backstop. In order to make the pivotal assessment, regulators will need information about recent contractual innovations and their risk-allocating characteristics. According to the scholarship on regulatory networks serving as communities of interpretation, we suggest in particular how regulators should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the real-world implications of evolving transactional structures. This paper then uses the rise of credit funds as a non-bank entities economically engaged in credit intermediation to apply this normative framework, pointing to recent contractual innovations that call for more regulatory scrutiny in a multipolar regulatory dialogue.

Keywords: shadow banking, regulatory arbitrage, principles-based regulation, credit funds, prudential supervision, non-bank financial intermediation

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

Suggested Citation

Thiemann, Matthias and Tröger, Tobias Hans, It’s the Tail-Risk, Stupid! (October 7, 2019). SAFE Working Paper No. 260; European Banking Institute Working Paper Series No. 49. Available at SSRN: or

Matthias Thiemann

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323

Tobias Hans Tröger (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
+49 69 798 34391 (Phone)
+49 69 798 34536 (Fax)


European Corporate Governance Institute (ECGI) ( email )

B-1050 Brussels


European Banking Institute ( email )


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