The Case for a Normatively Charged Approach to Regulating Shadow Banking - Multipolar Regulatory Dialogues as a Means to Detect Tail Risks and Preclude Regulatory Arbitrage

32 Pages Posted: 8 Oct 2019 Last revised: 28 Oct 2020

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); Goethe University Frankfurt - Faculty of Law

Date Written: February 11, 2020

Abstract

This paper contributes to the debate on the adequate regulatory treatment of non-bank financial intermediation (NBFI). It proposes an avenue for regulators to keep regulatory arbitrage under control and preserve sufficient space for efficient financial innovation at the same time. We argue for a normative approach to supervision that can overcome the proverbial race between hare and hedgehog in financial regulation and demonstrate how such an approach can be implemented in practice. We first show that regulators should primarily analyse the allocation of tail risk inherent in NBFI. Our paper proposes to apply regulatory burdens equivalent to prudential banking regulation if the respective transactional structures become only viable through indirect or direct access to (ad hoc) public backstops. Second, we use insights from the scholarship on regulatory networks as communities of interpretation to demonstrate how regulators can retrieve the information on transactional innovations and their risk-allocating characteristics that they need to make the pivotal determination. We suggest in particular how supervisors should structure their relationships with semi-public gatekeepers such as lawyers, auditors and consultants to keep abreast of the risk-allocating features of evolving transactional structures. Finally, this paper uses the example of credit funds as non-bank entities economically engaged in credit intermediation to illustrate the merits of the proposed normative framework and to highlight that multipolar regulatory dialogues are needed to shed light on the specific risk-allocating characteristics of recent contractual innovations.

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, The Case for a Normatively Charged Approach to Regulating Shadow Banking - Multipolar Regulatory Dialogues as a Means to Detect Tail Risks and Preclude Regulatory Arbitrage (February 11, 2020). SAFE Working Paper No. 260, European Banking Institute Working Paper Series No. 49, LawFin Working Paper No. 2, Available at SSRN: https://ssrn.com/abstract=3465534 or http://dx.doi.org/10.2139/ssrn.3465534

Matthias Thiemann

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Tobias Hans Tröger (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 34391 (Phone)
+49 69 798 34536 (Fax)

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

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.global/users/tobias-tr%C3%B6ger

Goethe University Frankfurt - Faculty of Law ( email )

Theodor-W.-Adorno-Platz 3 (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

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