IMF published working paper on possible unintended consequences of Basel III and Solvency II

08 August 2011

The IMF published a staff level working paper that seeks to present similarities and differences among Pillar 1 requirements of the two accords, and discusses possible unintended consequences of their implementation.

The paper acknowledges that there can be significant overlap in the business activities of banks and insurers, and argues that due to this overlap differences in the two accords can generate unintended consequences in the area of cost of capital, funding patterns, and interconnectedness, and  promote risk/product migration across or away from the two sectors.

The paper concludes the following:

• while group supervision has been strengthened, concerns about leakages still remain, especially with Solvency II;
• the adequacy of safety nets may need to be reviewed in the future as the likely increased use of covered bonds by banks for funding purposes would ring-fence assets so that they are unavailable to depositors and unsecured creditors in case of resolution;
• and there appears to be a need for empirical investigation about the magnitude of the impact of unintended consequences. There is no universally agreed set of unintended consequences.

Working paper

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