Notes on "Structural bank regulation initiatives: approaches and implications" (Leonardo Gambacorta and Adrian van Rixtel)

Structural bank regulation initiatives: approaches and implications

Leonardo Gambacorta and Adrian van Rixtel 
Monetary and Economic Department
April 2013

The likely implications of initiatives for:

• finanical stability and systemic risk
• banks business models
• the international activities of global banks

How effective to improve the financial system?
What can be the impacts on banks' profitability and business models, both nationally and internationally?

The proposals for structural bank regulation break with the conventional wisdom that the banking sector's efficiency and stability stands only to gain from the increased diversification of banks' activities.

Structural bank regulation initiatives are designed to reduce systemic risk in several ways:

• shield the institutions carrying out the protected activities from losses incurred elsewhere
• prevent subsidies supporting the protected activities from cutting the cost of risk-taking and inducing moral hazard in other business lines
• reduce the complexity and possibly the size -> easier to manage, more transparent to outside stakeholders and easier to resolve

However, banks may respond to the reforms by shifting activities beyond the perimeter of consolidated regulation, structural regulation may affect the international activities of universal banks in particular, structural regulation may create business models that are in fact more difficult to supervise and resolve