Financial regulation within Advanced Economies (AEs) is a key driver of capital flows to Emerging Market and Developing Economies (EMDEs). Bank capital rules affect the ability of developed country banks to lend and invest in EMDE financial instruments. Trading book capital rules influence whether banks can deal in Emerging Market (EM) cash and derivative instruments, and they crucially affect the liquidity of markets in these securities. Insurer and bank capital rules affect incentives to invest in important exposures closely associated with EM trade and investment, most notably infrastructure projects.
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