Financial Regulation: Regulatory Arbitrage and Regulatory Harmonization
52 Pages Posted: 23 Mar 2012
Date Written: March 21, 2012
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: Suggested Citation