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

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FSI Papers  |  No 24  |  04 February 2020 by  Rodrigo Coelho, Fernando Restoy and Raihan Zamil PDF full text (354kb)  |  21 pages Executive Summary (86 KB, PDF) 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

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FSI Papers  |  No 24  | 
04 February 2020
PDF full text
 (354kb)
 |  21 pages

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.

JEL classification: F30, G15, G21, G28

International Settlement
The Bank for International Settlements (BIS) is an international company limited by shares owned by central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work through subcommittees, the secretariats it hosts and through an annual general meeting of all member banks. It also provides banking services, but only to central banks and other international organizations. It is based in Basel, Switzerland, with representative offices in Hong Kong and Mexico City.

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