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Exploring the Challenges of Regulatory Capital Requirements

December 21st, 2023

Regulatory capital requirements pose significant challenges for financial institutions and other industries. These challenges are influenced by various factors, including evolving regulations, technological advancements, and economic considerations.

Evolving Regulations and Technological Advancements

The regulatory landscape is constantly evolving, with new regulations being adopted by authorities in different jurisdictions, such as the EU, US, and UK . Additionally, advancements in technology, particularly in artificial intelligence and machine learning, are impacting regulatory compliance, particularly in areas such as anti-money laundering/combating the financing of terrorism (AML/CFT) requirements .

Financial and Economic Considerations

The impact of regulatory capital requirements on financial institutions is substantial. For example, exploring different severities and forms of climate scenarios and determining how to assess climate risks on a dynamic balance sheet basis are crucial considerations for calibrating capital requirements . Furthermore, reducing capital requirements is a key focus for financial services, as it opens up new investment opportunities and aids in liquidity management and derivatives pricing .

Cross-Industry Impact

The challenges of regulatory capital requirements extend beyond the financial sector. For instance, the oil and gas industry, known for its capital-intensive nature, faces challenges related to capital requirements for production and exploration Similarly, the energy sector, particularly in countries like India, is exploring the additional capital required for clean energy technologies, highlighting the broader impact of regulatory capital requirements .