A Study Of Capital Regulation On Financial Holding Group Based On The View Of Regulatory Capital Arbitrage

The financial academia had comprehensively and deeply studied the financial crisis which started from2008. The financial institutions, including banks, insurance companies, and investment banks were blamed for their actions in developing, selling and trading the credit derivatives. Regulators around the world had strengthened capital regulation since then. Financial innovations based on avoiding capital regulation spring up after the Basel Accord, which built the first capital regulation framework to banks. These actions are now called regulatory capital arbitrage which let the banks release their regulatory capital and expand their business without even changing their risk level.The regulatory capital arbitrage technologies develop with the rise of financial holding group around the global. Fuzzification of the financial institution boundary and capital movement in group both make cross-sector arbitrage possible. Capital regulation based on separate supervision is not appropriate for financial holding group. Besides, because of the large scale of the group, once a capital adequacy failing leads to a solvency crisis, it will cause massive destruction even induces systemic risk. Thus, it is necessary to build a capital regulation framework against financial holding group based on regulatory capital arbitrage.There are two official documents against the regulation of financial holding groups. The first one is Supervision of Financial Conglomerates, proposed by Tripartate Group including IBFed, IOSCO and IAIS in1999.The other is Financial Conglomerates Directions proposed by European Committee in2002, which is the first leagle document in this field. Both documents make achivements in regulation of financail holding groups, especially in capital adequancy issue. However, there are still many flaws.There are now considerable amount of large scale financial holding group in China. But our regulation system remains in separate supervision level. Capital regulation against financial holding group in China is limited to a mechanism of joint conference and memorandum between separate supervision institution without formal legal document. Fortunately, financial products and trading technology in China are immature comparing to those in America and European countries. Therefore, regulatory capital arbitrage in China is not popular. This provides our regulators a time window so they can improve the regulation system to keep the finance system safe.This paper is divided into six chapters. Chapter1introduces the background, significance and the literature review of this paper. It also illustrates the main research methods and innovation. Chapter2elaborates the regulatory capital arbitrage in detail, including definition, development and influence. Chapter3is the preparation part, mainly focusing on the features of financial holding group. Before analyzing the group’s regulatory capital arbitrage actions, it is necessary to discuss its operating and risk characteristics which can influence its asset allocation and business strategy. Chapter4and5are core part of this paper. Chapter4generalizes several modes of regulatory capital arbitrage based on capital adequacy requirements of each separate institution. There are examples after each mode in order to explain the arbitrage effect. Chapter5proposes some improvements from regulation mode, ideology and practice, compared to the existing regulation framework. Chapter6proposes some recommendations in regulating the financial holding groups based on the purpose of controlling the regulatory capital arbitrage.