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

Author(s): Danièle Nouy

Date published: Sep 2017

SUERF Policy Note, Issue No 17
Danièle Nouy, Chair of the Supervisory Board, European Central Bank

Introduction

In 1986, Nobel laureate Merton Miller noted: “The major impulses to successful innovations over the past 20 years have come, I am saddened to have to say, from regulation and taxes.”

It is true that banks can be highly innovative when it comes to reducing the regulatory burden. They are always tempted to game the rules. They are tempted to exploit loopholes and seize on the fact that rules differ across countries and sectors.

Such regulatory arbitrage is, of course, a problem. Rules are put in place for a reason, and working around them defeats that purpose. As you all know, we have just emerged from the worst financial crisis since the Great Depression. That’s why we have made these rules stronger: to make such crises less likely. Whenever a bank tries to get around the rules, it increases the risk of another crisis.

So regulatory arbitrage is a matter of great concern for regulators and supervisors. Let’s take a closer look at how it works and what we can do about it.

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SUERF Policy Note, Issue No 17SUERF Policy Note, Issue No 17

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