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arXiv · 1502.03252

Diversification, protection of liability holders and regulatory arbitrage

Pablo Koch-Medina·Cosimo Munari·Mario Sikic
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Abstract

Any solvency regime for financial institutions should be aligned with the fundamental objectives of regulation: protecting liability holders and securing the stability of the financial system. The first objective leads to consider surplus-invariant capital adequacy tests, i.e. tests that do not depend on the surplus of a financial institution. We provide a complete characterization of closed, convex, surplus-invariant capital adequacy tests that highlights an inherent tension between surplus-invariance and the desire to give credit for diversification. The second objective leads to requiring consistency of capital adequacy tests across jurisdictions. Of particular importance in this respect are capital adequacy tests that remain invariant under a change of numéraire. We establish an intimate link between surplus- and numéraire invariant tests.

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Pablo Koch-Medina, Cosimo Munari, Mario Sikic. 2016-04-04. Diversification, protection of liability holders and regulatory arbitrage. https://arxiv.org/abs/1502.03252

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