However, a number of issues arise: (i) Should subsidiaries be given full national treatment by virtue of their local incorporation? If not what should be the nature and extent of restrictions? (ii) Should the subsidiary form of presence be mandated for all new entrants or should it be selectively applied based on certain parameters?
It is obvious, however, that stricter regulation for some institutions might shift business to less regulated players. Regulators need to take this aspect of interconnectedness into account, too. The so-called shadow banking system can be a source of systemic risk because of unregulated liquidity and maturity transformation, the build-up of leverage, and procyclicality.