The Offshore Financial Centers (OFCs) for example must immediately enact legislation to prove that they have an "equivalent level of regulation", to protect their auditors that audit offshore companies with EU listings from being subject to a tough European oversight regime.

Otherwise, auditors and audit firms from "third countries" have to be registered in the EU and to be subject to oversight, quality assurance and sanctions.
 
Under Article 45(1) of Directive 2006/43/EC the competent authorities of the Member States are required to register third-country auditors and audit entities that conduct a statutory audit on certain companies incorporated outwith the Community whose transferable securities are admitted to trading on a market regulated within the Community.

Article 45(3) of Directive 2006/43/EC requires Member States to subject such registered third-country auditors and audit entities to their systems of oversight, quality assurance systems and systems of investigations and penalties.

The European Commission is required under Article 46(2) of Directive 2006/43/EC to assess the equivalence of third country oversight, quality assurance and investigation and penalties systems in cooperation with Member States and make a determine on it.

If those systems are recognised as equivalent, Member States may exempt third country auditors and audit entities from requirements of Article 45 of the Directive on the basis of reciprocity.

Basel iii and Regulatory Arbitrage

It is very interesting to monitor the regulatory differences that will definitely lead to regulatory arbitrage.

One more time, Basel iii looks like a menu approach, and counties will be able to do more or less, sooner or later.

Basel iii will again become something like a dream, and the national interpretation of Basel iii will become the law, which is going to be different from country to country.

Some important issues

1. The definition of the Tier 1 Capital.

A new definition has a huge impact for healthy (under Basel 2) banks. For years, some banks rely on types of hybrid equity that may now not meet the new Basel iii requirements.

For example, there is a form of non-voting bank capital in Germany, known as "silent participations”, which do not absorb losses as long as a bank is still in business.

For this reason the Basel Committee excludes them from banks' Tier 1 capital, which could force German banks to raise billions, as a quarter to a third of the capital reserves of German savings banks, cooperative banks, private banks and landesbanks come in the form of silent participations. We speak about 50 billion Euros.

If banks are unable to raise equity on capital markets, it could lead to a shortfall in loans to companies and municipalities in Germany of 300-400 billion Euros.

2. Investors will be scared.

If Tier 1 capital is less than 9%, banks will not be allowed to pay out dividends to shareholders.

In good times, banks have to allocate another 3%. It simply means that in good times banks need Tier 1 capital of 12% in order to be able to pay dividends.

If we add 4% Tier 2 capital, we reach an interesting number: 16% (6 percent Tier 1, plus 4 percent Tier 2, plus 3 percent conservation buffer, plus 3 percent anticyclical buffer).

And, remember, we have a more (very strict) definition of Tier 1 capital. Hybrids are out.

Hedge funds could plan to short certain banks.
 
Investors try to understand how much capital banks may need to raise in order to be able to pay dividends.

The Basel iii regulatory changes that require banks to hold more capital for risky assets will hit some banks that have large investment banking divisions especially hard.

And, this is just one area or regulatory arbitrage opportunities. If we add the differences in SIFIs, the banks that will be forced to sell insurance and securities subsidiaries...