Basel II/III versus Solvency II: convergence or divergence?

Details

Supervisors

Henrard, Luc

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

Over the last few decades, an historically unprecedented process of convergence has emerged within the global financial industry. The challenges raised by convergence most certainly recall the importance of cross-fertilisation of different perspectives and approaches; especially between banks and insurers, there is much that regulators can learn from each other. This view was shared by Malcolm D Knight, general Manager of the BIS, and goes back to 2004. But after the financial crisis of 2007-09, many people seems to have changed their minds on this debate of convergence. Hence the title of this Master Thesis "convergence or divergence?". Now, we organized the debate as follows. A first hypothesis, in line with Malcolm's speech (2004), states that different institutions should hold the same level of regulatory capital for the same risk. An alternative hypothesis, supported by Thimann (2014) and Insurance Europe (2014), emphasizes the idea that similar activities performed by different institutions need to be regulated differently. Indeed, the flawed perception that banks and insurers are comparable to some extend may lead to the equally flawed assumption that bank regulations can be used as blueprint for insurance regulation. Our conclusion reveals that although there are some shades of convergence between Basel III and Solvency II, the first hypothesis does not appear to hold. It is way too difficult to compare different regulatory regimes and reap the full benefits of convergence. More specifically, greater convergence in capital requirements would not be optimal as it could dangerously dampen the stability of the financial industry...