By Claudio Borio, Stijn Claessens and Nikola Tarashev
We propose a framework for classifying regulatory measures with a financial stability objective as activity-based (AB) or entity-based (EB). AB measures constrain an activity on a standalone basis, whereas EB measures constrain a combination of activities at the level of entities. Since such combinations underpin much of financial intermediation, financial stability regulation features EB measures at its core, even though its ultimate objective is to make financial activities more resilient. In discussing the relative merits of AB and EB measures, we apply our framework to the regulation of banks, collective investment vehicles and big techs. When addressing systemic risk, neither AB nor EB regulation need be consistent with a level playing field, contrary to a widely held view.