•  Another recent example: the European Market Infrastructure Regulation requires financial market infrastructures to be subject to European rules or rules that are deemed equivalent to Europe’s before they can provide services to EU players. These rules are well-intended and seek to address genuine regulatory concerns in these jurisdictions. But extending national rules across borders often gives rise to overlapping regulations, which can create additional compliance costs for internationally active financial institutions. If there are conflicts between different national requirements, or if the burden of complying with multiple sets of rules is significant, this may prevent the execution of trades on a cross-border basis. The risk is that the global derivatives and foreign exchange businesses, for example, might become trapped within regional borders, creating fragmented markets. Cross-border application of national rules may also risk complicating home-host collaboration, the principle of consolidated supervision, and cross-border resolution. •  A BIS working paper published in April 2013 cautioned that it may be difficult to design resolution plans for global banks which are required by different national regulations to operate different business models. •  An IMF staff discussion paper published in May 2013 highlighted that differences between national structural reforms could lead to cross-border regulatory arbitrage by global banks, posing a challenge to consolidated supervision. In the event that the imposition of national regulations across borders is unavoidable, we need robust mutual recognition frameworks in place. Such frameworks should be based on an outcome-based approach, and not a line-by-line correspondence of rules.

It may be the case that the post-crisis financial system may not be adequately structured to provide certain types of long-term financing. •  First, longer-term corporate and project finance loans already attract a higher capital charge compared to short term loans. Coupled with the increased overall capital requirements under Basel III, this may create a disincentive for long-term loans. •  Second, to meet liquidity requirements, banks may substitute long-term lending activities with short-term lending. In calculating the Net Stable Funding Ratio, lower weights are assigned to loans with maturities of less than a year. •  Third, Solvency II, which will impose higher risk charges on longer-dated assets, may result in insurers de-risking by taking on shorter-dated assets. •  Fourth, the interaction between central clearing, margining and capital requirements may impact the variety and liquidity of some derivatives such as long-dated interest rate swaps used to hedge risks associated with long-term financing. 6  BIS central bankers’ speeches  There may be scope for some intelligent, risk-sensitive fine-tuning of regulation: •  The design of risk weights for insurers should not penalise them for holding good quality long term assets, if they are matched by long term liabilities. •  The preferential treatment of sovereign debt in bank regulation should be reexamined, so that banks are not disincentivised from holding good quality, long term corporate debt. •  Better calibration of the risk weights for securitisation for banks and insurers may be necessary.