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Regulatory Corridors. The Reasons Behind Complexity in International and European Banking Regulation Accords

  • The international banking regulation regime is complex. This complexity leaves room for regulatory arbitrage and boosts administrative burdens, which reduces its mitigating effect on financial instability. This book addresses the question on why states agree on such a potentially inefficient regime. First, it evaluates research on international banking regulation negotiations, which either neglect complexity or offer insufficient functionalist regulatory capture arguments for its emergence. Second, it proposes an economic cost-benefit model that explains complexity in international banking regulation as a function of diverging preferences in multipolar negotiations. This is based on an outcome-based definition of complexity: regimes that yield a set of different potential outcomes for the same banks are complex. The degree of complexity is described by a regulatory corridor whose walls are the boundaries of this set. The larger such a corridor, the more costly are its implications in terms of stability but its boundaries come closer to the preferences of signatories. Based on this assumed trade-off, three main claims are derived: (i) states with diverging preferences will introduce at least some complexity in their multinational regulatory regime, as a regulatory corridors-solution allows at least one of them to come closer to their initial preferences, which is individually welfare-enhancing; (ii) this is not only a collective action problem, as a central planner would also introduce complexity (potentially to a different extent); and (iii) this holds in an intertemporal case with an infinite time-horizon; changing expectations might widen the optimal regulatory corridor. Third, these claims are evaluated in three qualitative case studies on the treatment of operational risk in Basel II, the implementation of Basel III capital requirements in the European Union, and the European bank resolution regime. They find support for propositions (i) and (ii). Other methods might be needed to evaluate (iii). A policy-relevant result of this research is that some degree of complexity can contribute to welfare-enhancement. Complexity that is the result of unmanaged collective action by states could reduce collective welfare while still being individually rational. Regulators should treat complexity as a variable in negotiations to achieve the former and avoid the latter.

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Metadaten
Document Type:Doctoral Thesis
Language:English
Author(s):Frederik Traut
Referee:Mark HallerbergORCiD, Thorsten Beck, Lucia Quaglia
Hertie Collections (Serial Number):Dissertations submitted to the Hertie School (09/2021)
Publication year:2021
Publishing Institution:Hertie School
Granting Institution:Hertie School
Thesis date:2021/08/23
Number pages:309
DOI:https://doi.org/10.48462/opus4-4074
Release Date:2021/08/25
Notes:
Shelf mark: 2021D009 + 2021D009+1
Hertie School Research:Publications PhD Researchers
Licence of document (German):Creative Commons - CC BY - 4.0 International
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