A halt to the regulatory arbitrage that became rife in the financial services industry following the introduction of Basle I was a key objective when the new Basle II rules were being planned.
It’s fair to say that the securitization, credit derivatives and structured credit businesses would not exist without regulatory capital arbitrage. A vast industry has grown out of repackaging assets and selling them to third parties that are not constricted under Basle rules. The trick is that while the regulatory risk associated with the sale is transferred – freeing up banks’ capacity to continue originating...
