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Offshore Finance, shadow banking and the issue of regulatory arbitrage

Offshore Finance, shadow banking and the issue of regulatory arbitrage . Rodrigo Fernandez SOMO / KU Leuven . What is shadow banking?. a network of non-bank entities that intermediate credit in a unregulated market environment outside conventional banking structures .

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Offshore Finance, shadow banking and the issue of regulatory arbitrage

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  1. Offshore Finance, shadow banking and the issue of regulatory arbitrage Rodrigo Fernandez SOMO / KU Leuven

  2. What is shadow banking? a network of non-bank entities that intermediate credit in a unregulated market environment outside conventional banking structures.

  3. Why does it matter? • ‘Back to the future’: banking from 18th century, with 21th century technology • no public backstop • Credit creation is outside the scope of public authority • Unstable market • Complex information asymmetries • Lessons from the eurodollar markets

  4. What is an Offshore Financial Center? • “An OFC is a country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy.” IMF 2007 • “An OFC may be defined as a jurisdiction in which transactions with non-residents far outweigh transactions related to the domestic economy” Bank of England 2001

  5. Why does it matter? OFC’s enable capital to move out of the regulated environment of the nation state, which leads to: • Eroding the regulatory capacity of nation states • Re-scaling of finance • Regulatory arbitrage • Eroding the sovereignty of nation states • Tax evasion • Tax avoidance

  6. Offshore Architecture of the ‘Holland Route’ • The London branch of the globally active bank acts as lead manager and arranger • The Dutch SFI is a shell company and formally acts as issuer of the notes • A large Dutch trust firm is responsible for all local administrative tasks and responsibilities that are related to a Dutch domicile and tax ruling • Administrative functions related to the note program, are conducted by one or more banks located in the UK • The notes are listed on the exchanges of Ireland, Luxembourg, or both, but are also sold OTC

  7. Conclusion • Tax avoidance and regulatory arbitrage are embedded in the same offshore industry • Difficult to disentangle financial from non financial conduit structures • Need to include problem of regulatory arbitrage in debate on tax havens

  8. Composition of the Dutch OFI sector

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