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This Article is a rejoinder to a recent comment by Professor Romano on an earlier paper I coauthored with Christian Kirchner. Professor Romano suggests regulatory arbitrage, rather than the targeted regulation of bank lending to hedge funds under Basel II, as a hedge against systemic failure. I contend that it was not harmonization through Basel II but rather the profitability of certain assets and business strategies that caused banks to hold similar assets and engage in similar strategies. In particular, I find that the increasing role of hedge funds in the credit derivatives market, in combination with the market's recent failure, suggests that an increased emphasis on banks' lending exposure to hedge funds could be justified. Using the methodological approach of New Institutional Economics, I evaluate recent regulatory changes, including the US Dodd-Frank Act, the AIFM Directive, and other pertinent regulation. I …