Financial Regulation: Regulatory Arbitrage and Regulatory Harmonization

52 Pages Posted: 23 Mar 2012

See all articles by Pascal Frantz

Pascal Frantz

London School of Economics

Norvald Instefjord

University of Essex - Essex Business School

Date Written: March 21, 2012

Abstract

This paper analyzes the problem of designing optimal financial regulation when regulatory arbitrage allows competition from other regulators, and whether regulatory harmonization as a means to curb regulatory arbitrage is desirable. We find (i) that regulatory arbitrage and competition matter in the sense that the optimal autarky approach to regulation may not be optimal in open economies; (ii) regulatory arbitrage that takes place in equilibrium is not as important as the possibility of regulatory arbitrage and the associated impact on regulatory competition; and (iii) regulatory diversity can be welfare optimal even though it leads to more regulatory arbitrage activity than regulatory harmonization.

Keywords: Regulatory arbitrage, Regulatory harmonization, Principles based regulation, Rules based regulation

JEL Classification: G28

Suggested Citation

Frantz, Pascal and Instefjord, Norvald, Financial Regulation: Regulatory Arbitrage and Regulatory Harmonization (March 21, 2012). Available at SSRN: https://ssrn.com/abstract=2027100 or http://dx.doi.org/10.2139/ssrn.2027100

Pascal Frantz

London School of Economics ( email )

Houghton Street
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Norvald Instefjord (Contact Author)

University of Essex - Essex Business School ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

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