Skip to main content
SpringerLink
Log in

What Is and What Is not Regulatory Arbitrage? A Review and Syntheses

  • Chapter
  • First Online:
Financial Markets, SME Financing and Emerging Economies

Abstract

Regulatory arbitrage is an avoidance strategy of regulation that is exercised as a result of a regulatory inconsistency. As a regulatory response strategy, it has been in the shadow of other possible determinants of regulatory development. This chapter reviews 91 research articles and addresses the analytical foundations of regulatory arbitrage in the literature in a search for operative definitions, theories and methodological concerns. Despite the observation that many studies treat regulatory arbitrage as a phenomenon that everyone implicitly knows, the review shows that an explicit understanding of regulatory arbitrage and its motives remains scattered. Theoretically speaking, the chapter concludes that the dominant approach is that when a regulatory arbitrage opportunity exists, it is utilised. However, several theories examining the opportunity costs related to the use of regulatory arbitrage are also identified. Both methodologically and empirically, the chapter concludes that regulatory arbitrage as a strategic choice is characterised as a non-action of an event, thus delimiting the opportunities to conduct empirical research. Transaction-based regulatory arbitrage is more straightforward, and several studies therefore present measures of regulatory arbitrage. More precise and operative definitions and expanded eclectic theoretical understanding of drivers may spur stronger empirical research and regulatory development.

The author wishes to thank Handelsbankens Forskningsstiftelser for providing financial support.

This is a preview of subscription content, log in via an institution to check access.

Access this chapter

Log in via an institution
Chapter
USD 29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD 99.00
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD 129.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD 129.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Institutional subscriptions

References

  • Acharya, V.V., T. Cooley, M. Richardson, R. Sylla, and I. Walter. 2011. The Dodd-Frank wall street reform and consumer protection act: Accomplishments and limitations. Journal of Applied Corporate Finance 23 (1): 43–56.

    Article  Google Scholar 

  • Acharya, V.V., P. Schnabl, and G. Suarez. 2013. Securitization without risk transfer. Journal of Financial Economics 107 (3): 515–536.

    Article  Google Scholar 

  • Acharya, V.V., and S. Steffen. 2015. The “greatest” carry trade ever? Understanding eurozone bank risks. Journal of Financial Economics 115 (2): 2015–2236.

    Google Scholar 

  • Agostino, M., and M. Mazzuca. 2011. Empirical investigation of securitisation drivers: The case of Italian banks. The European Journal of Finance 17 (8): 623–648.

    Article  Google Scholar 

  • Aiyar, S., C.W. Calomiris, and T. Wieladek. 2014a. Does Macro-Prudential regulation leak? Evidence from a UK policy experiment. Journal of Money Credit and Banking, 46 (1, Suppl.): 181–186.

    Google Scholar 

  • Aiyar, S., C.W. Calomiris, and T. Wieladek. 2014b. Identifying channels of credit substitution when bank capital requirements are varied. Economic Policy 29 (77): 45–77.

    Article  Google Scholar 

  • Ambrose, B.W., M. Lacour-Little, and A.B. Sanders. 2005. Does capital arbitrage, reputation, or asymmetric information drive Securitisation? Journal of Financial Services Research 28(1/2/3): 113–133.

    Google Scholar 

  • Barkin, J.S. 2015. Racing all over the place: A dispersion model of international regulatory competition. European Journal of International Relations 21 (1): 171–193.

    Article  Google Scholar 

  • Berg, T., B. Gehra, and M. Kunisch. 2011. A certification model for regulatory arbitrage: Will regulatory arbitrage persist under Basel III? The Journal of Fixed Income 21 (2): 39–56.

    Article  Google Scholar 

  • Blaško, M., and Sinkey J.F., Jr. 2006. Bank asset structure, real-estate lending, and risk-taking. The Quarterly Review of Economics and Finance 46 (1): 53–81.

    Article  Google Scholar 

  • Blundall-Wignal, A., and P. Atkinson. 2009. Origins of the financial crisis and requirements for reform. Journal of Asian Economics 20 (5): 536–548.

    Article  Google Scholar 

  • Boyson, N.M., R. Fahlenbrach, and R.M. Stulz. 2014a. Why do banks practice regulatory arbitrage? Evidence from usage of trust preferred securities, Working paper, National Bureau of Economic Research. http://www.nber.org/papers/w19984. Accessed 30 Sep 2015.

  • Boyson, N., J. Helwege, and J. Jindra. 2014b. Crises, liquidity shocks, and fire sales at commercial banks. Financial Management 43 (4): 857–884.

    Google Scholar 

  • Calem, P.J., and J.R. Follain. 2007. Regulatory capital arbitrage and the potential competitive impact of Basel II in the market for residential mortgages. Journal of Real Estate Finance & Economics 35 (2): 197–219.

    Article  Google Scholar 

  • Calem, P.J., and R. Rob. 1999. The impact of capital-based regulation on bank risk-taking. Journal of Financial Intermediation 8 (4): 317–352.

    Article  Google Scholar 

  • Calomiris, C.W., and J.R. Mason. 2004. Credit card securitization and regulatory arbitrage. Journal of Financial Services Research 26 (1): 5–27.

    Article  Google Scholar 

  • Carbo-Valverde, S., E.J. Kane, and F. Rodriguez-Fernandez. 2012. Regulatory arbitrage in cross-border banking mergers within the EU. Journal of Money, Credit and Banking 44 (8): 1609–1629.

    Article  Google Scholar 

  • Cardone-Riportella, C., R. Samaniego-Medina, and A. Trujillo-Ponce. 2010. What drives bank securitisation? The Spanish experience. Journal of Banking and Finance 34 (11): 2639–2651.

    Article  Google Scholar 

  • Carruthers, B.G., and N.R. Lamoreaux. 2016. Regulatory races: The effects of jurisdictional competition on regulatory standards. Journal of Economic Literature 54 (1): 52–97.

    Article  Google Scholar 

  • Dhanani, A., S. Fifield, C. Helliar, and L. Stevenson. 2007. Why UK companies hedge interest rate risk. Studies in Economics and Finance 24 (1): 72–90.

    Article  Google Scholar 

  • Dias, R. 2016. Credit default Swaps: Has the GFC influenced perceptions of their utility for banks. Journal of Economic Surveys 30 (4): 712–735.

    Article  Google Scholar 

  • Downs, D.H., and L. Shi. 2015. The impact of reversing regulatory arbitrage on loan originations: Evidence from bank holding companies. Journal of Real Estate Finance and Economics 50 (3): 307–338.

    Article  Google Scholar 

  • Eling, M., and H. Schemeister. 2010. Insurance and the credit crisis: Impact and ten consequences for risk management and supervision. The Geneva Papers 35 (1): 9–34.

    Google Scholar 

  • Ellul, A., C. Jotikasthira, and C.T. Lundblad. 2014. Mark-to-market accounting and systemic risk: Evidence from the insurance industry. Economic Policy 29 (78): 297–341.

    Article  Google Scholar 

  • Fleischer, V. 2010. Regulatory arbitrage. Texas Law Review 89 (2): 228–290.

    Google Scholar 

  • Freixas, X., G. Lóránth, and A.D. Morrison. 2007. Regulating financial conglomerates. Journal of Financial Intermediation 16 (4): 479–514.

    Article  Google Scholar 

  • Fung, H.-G., J. Yau, and G. Zhang. 2011. Reported trade figure discrepancy, regulatory arbitrage, and round-tripping: Evidence from the China-Hong Kong trade data. Journal of International Business Studies 42 (1): 152–176.

    Article  Google Scholar 

  • Galichon, A. 2010. The VAR at risk. International Journal of Theoretical and Applied Finance 13 (4): 503–505.

    Article  Google Scholar 

  • Harvard Law Review. (2004). Investor liability financial innovations in the regulatory state and the coming revolution in corporate law 117 (8): 1841–1958.

    Google Scholar 

  • Houston, J.F., C. Lin, and Y. Ma. 2012. Regulatory arbitrage and international bank flows. The Journal of Finance 67 (5): 1845–1895.

    Article  Google Scholar 

  • Jain, A., P. Jain, T.H. McInish, and M. McKenzie. 2013. Worldwide reach of short selling regulations. Journal of Financial Economics 109 (1): 177–197.

    Article  Google Scholar 

  • Jones, D. 2000. Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues. Journal of Banking & Finance 24 (1/2): 35–58.

    Article  Google Scholar 

  • Karolyi, G.A., and A.G. Taboada. 2015. Regulatory arbitrage and cross-border bank acquisitions. The Journal of Finance 70 (6): 2395–2450.

    Article  Google Scholar 

  • Knoll, M.S. 2005. Regulatory arbitrage using put-call parity. Journal of Applied Finance 15 (1): 64–74.

    Google Scholar 

  • Koch-Medina, P., and C. Munari. 2016. Unexpected shortfalls of expected shortfall: Extreme default profiles and regulatory arbitrage. Journal of Banking & Finance 62: 141–151.

    Article  Google Scholar 

  • Kreiner, R.E. 2002. Banking in a theory of the business cycle: A model and critique of the Basle Accord on risk-based capital requirements for banks. International Review of Law and Economics 21 (4): 413–433.

    Article  Google Scholar 

  • Kroszner, R.S., and P.E. Strahan. 2015. Financial regulatory reform: Challenges ahead. American Economic Review: Papers & Proceedings 101 (3): 242–246.

    Article  Google Scholar 

  • Lastra, R.M. 2004. Risk-based capital requirements and their impact upon the banking industry: Basel II and Cad III. Journal of Financial Regulation and Compliance 12 (3): 225–239.

    Article  Google Scholar 

  • Liu, X. 2015. How institutional and organizational characteristics explain the growth of contingent work in China. ILR Review 68 (2): 372–387.

    Article  Google Scholar 

  • López-Andión, C., A. Iglesias-Casal, M.C. López-Penabad, and J.M. Maside-Sanfiz. 2015. The solvency of financial institutions in Spain: Lessons from securitization. Applied Economics 47 (44): 4741–4753.

    Article  Google Scholar 

  • Lysandrou, P., and A. Nesvetailova. 2015. The role of shadow banking entities in the financial crisis: A disaggregated view. Review of International Political Economy 22 (2): 257–279.

    Article  Google Scholar 

  • MacKenzie, D. 2011. The credit crisis as a problem in the sociology of knowledge. American Journal of Sociology 116 (6): 1778–1841.

    Article  Google Scholar 

  • Mehran, H., and A. Thakor. 2011. Bank capital and value in the cross-section. The Review of Financial Studies 24 (4): 1019–1067.

    Article  Google Scholar 

  • Menezes, F.M., and C. Roessler. 2010. Good and bad consistency in regulatory decisions. The Economic Record 86 (275): 504–516.

    Article  Google Scholar 

  • Milcheva, S. 2013. Cross-country effects of regulatory capital arbitrage. Journal of Banking & Finance 37 (12): 5329–5345.

    Article  Google Scholar 

  • Miller, A.R., C. Eibner, and C.R. Gresenz. 2013. Financing of employer sponsored health insurance plans before and after health reform: What consumers don’t know won’t hurt them? International Review of Law and Economics 36: 36–47.

    Article  Google Scholar 

  • Mingo, J.J. 2000. Policy implications of the federal reserve study of credit risk models at major US banking institutions. Journal of Banking & Finance 24 (1): 15–33.

    Article  Google Scholar 

  • Moshiran, F. 2012. The future and dynamics of global systemically important banks. Journal of Banking & Finance 36 (10): 2675–2679.

    Article  Google Scholar 

  • Oliver, C. 1991. Strategic responses to institutional processes. Academy of Management Review 16 (1): 145–179.

    Article  Google Scholar 

  • Ongena, S., A. Popov, and G.F. Udell. 2013. “When the cat’s away the mice will play”: Does regulation at home affect bank risk-taking abroad? Journal of Financial Economics 108 (3): 727–750.

    Article  Google Scholar 

  • Partnoy, F. 1997. Financial derivatives and the cost of regulatory arbitrage. The Journal of Corporation Law 22 (2): 212–256.

    Google Scholar 

  • Siegel, J.I., A.N. Licht, and S.H. Schwartz. 2013. Egalitarianism, cultural distance and foreign direct investment: A new approach. Organization Science 24 (4): 1174–1194.

    Google Scholar 

  • VanHoose, D. 2007. Market discipline and supervisory discretion in banking: Reinforcing or conflicting pillars of Basel II? Journal of Applied Finance 17 (2): 105–118.

    Google Scholar 

  • Wang, R. 2016. Regulatory arbitrage of risk measures. Quantitative Finance 16 (3): 337–347.

    Article  Google Scholar 

  • Willesson, M. 2016. A note on regulatory arbitrage: Bank risk, capital risk, interest rate risk and ALM in European banking. In Liquidity risk, efficiency and new bank business models, ed. S. Carbó Valverde, P.J. Cuadros Solas, and F. Rodríguez Fernandez. Houndmills: Palgrave Macmillan. ISBN: 978-3-319-30819-7.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Linnæus University, Växjö, Sweden

    Magnus Willesson

Authors
  1. Magnus Willesson
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Magnus Willesson .

Editor information

Editors and Affiliations

  1. Department of Business Administration, University of Verona, Verona, Italy

    Giusy Chesini

  2. Department of Business Administration, University of Verona, Verona, Italy

    Elisa Giaretta

  3. Department of Economics and Statistics, University of Udine, Udine, Italy

    Andrea Paltrinieri

Rights and permissions

Reprints and permissions

Copyright information

© 2017 The Author(s)

About this chapter

Cite this chapter

Willesson, M. (2017). What Is and What Is not Regulatory Arbitrage? A Review and Syntheses. In: Chesini, G., Giaretta, E., Paltrinieri, A. (eds) Financial Markets, SME Financing and Emerging Economies. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-54891-3_5

Download citation

  • DOI: https://doi.org/10.1007/978-3-319-54891-3_5

  • Published:

  • Publisher Name: Palgrave Macmillan, Cham

  • Print ISBN: 978-3-319-54890-6

  • Online ISBN: 978-3-319-54891-3

  • eBook Packages: Economics and FinanceEconomics and Finance (R0)

Publish with us

Policies and ethics

Search

Navigation