Regulatory arbitrage refers to the practice of exploiting differences in regulatory requirements between different jurisdictions or sectors in order to gain a competitive advantage. This can be done through a variety of means, such as locating a business in a jurisdiction with more favorable regulations, using financial instruments or structures that are not subject to the same level of regulation, or shifting activities from one sector to another to take advantage of different regulatory regimes.
Here’s an example of regulatory arbitrage:
Imagine that Company A is a financial institution that is subject to strict capital requirements in its home country. To avoid these requirements, Company A sets up a subsidiary in a jurisdiction with less stringent capital requirements and transfers some of its higher-risk assets to this subsidiary. As a result, the subsidiary is able to take on more risk with the same amount of capital, giving Company A a competitive advantage over other financial institutions that are subject to the stricter capital requirements. This is an example of regulatory arbitrage through the use of subsidiaries to take advantage of differences in capital requirements between jurisdictions.
This page was last updated on January 2, 2023.