Law Commons^™

The Dialectics Of Bank Capital: Regulation And Regulatory Capital Arbitrage, Erik F. Gerding

Publications

This article outlines the reasons that banks and other financial institutions engage in regulatory capital arbitrage and the techniques they use to do so. Regulatory capital arbitrage describes transactions and structures that firms use to lower the effective regulatory “tax rate” of regulatory capital requirements. To the extent that these regulations force financial institutions to internalize the externalities created by their potential insolvency (including systemic risk externalities), the incentives to engage in regulatory capital arbitrage will persist. Financial institutions employ a range of complex transactions and structures, including securitization, to engage in regulatory capital arbitrage.

The article briefly sketches how …