Convergence in the prudential regulation of banks – what is missing?

Regulatory-driven market fragmentation poses challenges for the proper functioning of the global financial system. Unwarranted differences in prudential requirements may distort competition and discourage banks from undertaking cross-border activities. This could reduce the efficiency of the financial system, dampen international capital flows and impede global risk-sharing.

Although substantial efforts have been made to ensure full, timely and consistent implementation of international standards, prudential regimes may still diverge. This paper identifies three main sources of regulatory fragmentation in the banking sector, which can lead to different prudential outcomes across jurisdictions. These include heterogeneous practices in the measurement of assets, in particular loans and other assets that are heavily assumption-dependent; differences in the scope of application of Basel III's regulatory requirements in Pillar 1; and divergent approaches in the implementation of the supervisory review process under Pillar 2. We also outline possible further work in the policy domain, particularly in areas where excessive discrepancies still exist.