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15 September 2017

ECB: Gaming the rules or ruling the game? – How to deal with regulatory arbitrage


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Regulatory arbitrage is a matter of great concern for regulators and supervisors. Danièle Nouy, in her speech, takes a closer look at how it works and what we can do about it.


Danièle Nouy  said: “I think we can all agree that an unregulated banking sector is not a good thing. Experience – some of it fairly recent – shows that banks need rules. Effective rules help to ensure that banks remain resilient and can reliably serve the economy.”

It is true, of course, that rules also place a burden on banks. Complying with them is costly. As a result, banks are always tempted to work around rules, particularly in difficult times such as these.

Such behaviour may look optimal from the point of view of an individual bank. But from the perspective of society as a whole, it is not. Working around the rules undermines their purpose and might lead to another crisis. And it is known what such crises entail for the economy, for savers, for investors and for taxpayers.

So, regulators and supervisors are engaged in a game of catch-up with banks – a game that is sometimes referred to as “regulatory dialectic”. Regulators set rules in order to ensure stability and prevent financial crises. Banks seek ways around these rules in order to lessen the associated burden. Regulators then adjust the rules; and banks find new ways to get around them. This game has probably been going on since the very first rule was designed – and not just in banking, either. And it will probably go on until the end of time.

So it is in everyone’s interests for supervisors and regulators to have the edge in this game. They have to rule the game, in order to prevent banks from gaming the rules.

And this is the key question – do supervisors and regulators rule the game? Well, today’s rules are far more harmonised than ever before – at both global and European levels. That leaves less scope for regulatory arbitrage. At the same time, we can also see more clearly what banks might be up to. Thanks to European banking supervision, there is a much better overview of their activities. It is now more able to detect regulatory arbitrage at an early stage and react quickly.

She said: “So, regulators and supervisors have made their latest move in the game of catch-up. We would now expect the banks to make theirs. In my view, however, banks should reconsider their position on regulatory arbitrage. This is not a movie where a rogue hero happily flouts all the rules to save the world. This is about the stability of the banking sector, the prosperity of the economy and the wealth of society as a whole.”

Full speech



© ECB - European Central Bank


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