PERIKLIS THIVAIOS | Partner, True North Partners LLP
LAURA NUÑEZ-LETAMENDIA | Professor of Finance, IE Business School

Unlike microprudential regulation that focuses on the stability of individual institutions, macroprudential regulation focuses on the stability of the financial system as a whole. However, despite the increased interest in a system-wide lens, our empirical research indicates that the design of the Solvency II and Basel II/III frameworks, while intended to strengthen the stability of each sector individually, may be the source of endogenous destabilizing effects across the financial system, due to incentives for increased asset concentration and capital standard procyclicality. The support for the capital arbitraging hypothesis was weaker.