Types of Regulatory Arbitrage, What is Regulatory Arbitrage?

"Regulatory arbitrage" borrows the term "arbitrage" from finance. According to the definition of the New Palgrave Monetary and Financial Dictionary, "arbitrage" is an investment strategy that guarantees positive returns under certain circumstances, with no possibility of negative returns and no net investment. Its main characteristics are no risk, no net investment, or positive returns.

Similar to arbitrage, regulatory arbitrage catches the imbalance in the market, and the transaction cost of the arbitrage strategy is the key factor that determines the attractiveness of arbitrage opportunities. However, there is no unified definition of "regulatory arbitrage" at home and abroad.

It is generally believed that when the economy meets the following two conditions, there will be regulatory arbitrage opportunities, and rational market players will choose the optimal trading strategy to maximize their own utility

1) An economic purpose that can be achieved through multiple trading strategies.

2) There are different ways of treating the above-mentioned trading strategies that are essentially the same but in different forms. The difference in the treatment of the system stems from the inherent incompleteness of the system, which cannot give a sufficiently precise definition of the economic substance of the transaction.

Regulatory arbitrage is a neutral term, which is wrong. There is no unified definition of "regulatory arbitrage" at home and abroad. It is generally believed that when the economy meets the following two conditions, there will be regulatory arbitrage opportunities, and rational market players will choose the optimal trading strategy to maximize their own utility

An economic purpose that can be achieved through multiple trading strategies. For the above-mentioned trading strategies that are essentially the same but in different forms, there is a non-discussion and treatment of the regulatory regime. The differences in the way regulatory regimes are treated are due to the inherent incompleteness of the regimes, which do not provide a sufficiently precise definition of the economic substance of transactions.

Manifestations of financial regulatory arbitrage: From the perspective of arbitrage means and tools, financial institutions in China's financial market mainly apply for new types of business licenses through the conversion of registration places, new types of business licenses, innovative business applications, channel leasing, business contracting, special purpose company establishment, implicit **, business transfer and other ways;

Shift from regions, markets and institutions with high regulatory requirements to regions, markets and institutions with low regulatory requirements to avoid regulation, reduce regulatory costs, establish unequal advantages, and obtain maximum returns.

The impact of financial regulatory arbitrage: financial regulatory arbitrage makes financial market transactions and activities more hidden, volatile and volatile, strengthens information asymmetry, enables financial institutions to evade financial supervision and carry out high-risk financial activities, may increase leverage, concentration risk, increase market volatility, and increase systemic risk.

On the positive side, financial regulatory arbitrage is the result of regulatory discrepancies or blind spots in supervision, distribution and management, and the existence of regulatory arbitrage activities is conducive to regulators to find problems to review policies, alleviate the distortions caused by unreasonable regulatory rules, put pressure on regulatory authorities to reform regulatory policies, and promote the continuous progress of regulatory policies.

Regulatory arbitrage refers to the use of financial institutions to arbitrage the contradictions between regulatory policies, although it helps to eliminate the loopholes of regulatory policies to a certain extent, but from the macro **, it is not only a waste of capital.

Summary. Regulatory arbitrage is the arbitrage behavior of banking financial institutions to obtain income by violating the requirements of the regulatory system or regulatory indicators". In layman's terms, I think it is an economic end that can generally be achieved by a variety of trading means.

Since the regulators have different compliance regulations for different trading methods, financial institutions can adopt trading methods that can achieve arbitrage purposes such as circumventing regulatory requirements, saving capital, reducing provisions, circumventing credit line control, and expanding business volume. To give a specific example, there are two ways for a bank's proprietary funds to invest in the equity of a non-financial enterprise, one is to directly purchase the enterprise**, and the other is to purchase it indirectly (for example, the bank first entrusts a securities firm to set up an asset management plan, and then the asset management plan comes to purchase the enterprise**). In fact, direct purchases are prohibited by regulation, so banks can achieve their own ends by buying indirectly.

Think of this as regulatory arbitrage.

Before the introduction of the new regulations on asset management, how can financial institutions conduct regulatory arbitrage?

Hello, here is the detailed explanation.

I'm sorry I don't understand, but can you elaborate on that?

Regulatory arbitrage is an arbitrage behavior in which banking financial institutions obtain profits by violating the requirements of the regulatory system or regulatory indicators. In layman's terms, I think it is an economic goal that can generally be achieved by a variety of means of trading. Since the regulators have different compliance regulations for different trading methods, financial institutions can adopt trading methods that can achieve arbitrage purposes such as circumventing regulatory requirements, saving capital, reducing provisions, circumventing credit line control, and expanding business volume.

To give a specific example, there are two ways for a bank's proprietary funds to invest in the equity of a non-financial enterprise, one is to directly purchase the enterprise**, and the other is to purchase it indirectly (for example, the bank first entrusts a securities firm to set up an asset management plan, and then the capital management plan comes to purchase the enterprise**). In fact, direct purchases are prohibited by regulation, so banks can achieve their own ends by buying indirectly. Think of this as regulatory arbitrage.