Determining appropriate capital adequacy standards for the shadow banking system will indeed be a key challenge in an effective redesign of the regulatory system. A related challenge is to ensure that tighter capital standards for banks and other highly regulated entities do not result in their simply shifting activity to less regulated areas, including off-balance-sheet activities such as structured investment vehicles. This would simply encourage more risk taking and raise systemic risk as well, since many off-balancesheet activities could end up being effectively on-balance sheet at times of crises. However, the truth is that we are far from completely figuring out how to control these institutions and types of transactions and it is unlikely that there will be an approach clever enough to provide the same level of systemic protection in regard to shadow banks as there will be for highly regulated entities. Conclusion When scrutinizing the impact of the regulatory changes on the EE’s, there are no doubts that the reform process is an important qualitative step forward for the overall financial industry and its implementation will mean more stable financial sector, lower probability of financial crisis and less “headaches” for the authorities responsible for macroeconomic and financial policies. Yet, apparently, there are many angles within the new regulation which should be further well screened and assessed in terms of their potential adverse impact, especially in emerging markets due to different challenges.
Regarding the tighter liquidity requirements (modeled as a 25% increase in the holding of liquid assets, combined with an extension of the maturity of banks’ wholesale liabilities) MAG’s estimations point to a median increase in lending spreads of 14 basis points and a fall in lending volumes of 3.2% after four and a half years. This is estimated to be associated with a median decline in GDP in the order of 0.08% relative to the baseline trend. An IMF study dating as of February 2012, reports similar results to MAG’s research, finding that in the absence of any monetary policy response, a permanent synchronized global increase in capital requirements for all banks by  1  For instance the EBA requirements and the Volcker Rule, within the Dodd-Frank Law in US. 2  Banco Bilbao Vizcaya Argentaria. 4  BIS central bankers’ speeches  1 percentage point would cause a peak reduction in GDP of around 0.5 percentage points, of which around 0.1 percentage point would result from international spillovers. Their findings show somewhat higher losses in EMEs as compared to AEs (0.74 percentage point loss in GDP in EMEs as compared to 0.46 percentage points in AEs) due to higher estimated spillover effects. The third point of transmission relates to development of financial markets EE’s. The development of deep domestic financial markets can improve the economy’s ability to absorb shocks and manage financial risks.