Copyright Arbitrage

Regulatory arbitrage—defined as the manipulation of regulatory treatment for the purpose of reducing regulatory costs or increasing statutory earnings—is often seen in heavily regulated industries. An increase in the regulatory nature of copyright, coupled with rapid technological advances and evolving consumer preferences, have led to an unprecedented proliferation of regulatory arbitrage in the area of copyright law. This Article offers a new scholarly account of the phenomenon herein referred to as “copyright arbitrage.” In some cases, copyright arbitrage may work to expose and/or correct for an extant gap or inefficiency in the regulatory regime. In other cases, copyright arbitrage may contravene one or another of copyright’s foundational goals of incentivizing the creation of, and ensuring access to, copyrightable works. In either case, the existence of copyright arbitrage provides strong support for the classification (and clarification) of copyright as a complex regulatory regime in need of a strong regulatory apparatus. This Article discusses several options available for identifying and curbing problematic copyright arbitrage. First, courts can take a purposive, substantive approach to interpretations of the Copyright Act. Second, Congress can empower a regulatory agency with rulemaking and enforcement authority. Finally, antitrust law can help to curb the anticompetitive effects of copyright arbitrage resulting from legislative capture

The Dialectics of Bank Capital: Regulation and Regulatory Capital Arbitrage

This article outlines the reasons that banks and other financial institutions engage in regulatory capital arbitrage and the techniques they use to do so. Regulatory capital arbitrage describes transactions and structures that firms use to lower the effective regulatory “tax rate” of regulatory capital requirements. To the extent that these regulations force financial institutions to internalize the externalities created by their potential insolvency (including systemic risk externalities), the incentives to engage in regulatory capital arbitrage will persist. Financial institutions employ a range of complex transactions and structures, including securitization, to engage in regulatory capital arbitrage. The article briefly sketches how capital regulations and regulatory capital arbitrage have evolved in dialectical fashion. This article concludes by describing and evaluating two broad approaches to dealing with the dynamic and unstable nature of capital rules (i.e. their constant erosion by regulatory capital arbitrage): simple, broad brush rules (such as simple and large increases in regulatory capital levels) and more regulatory engineering that attempts to keep pace with the increasing complexity of financial institution balance sheets and transactions

The Dialectics of Bank Capital: Regulation and Regulatory Capital Arbitrage

This article outlines the reasons that banks and other financial institutions engage in regulatory capital arbitrage and the techniques they use to do so. Regulatory capital arbitrage describes transactions and structures that firms use to lower the effective regulatory “tax rate” of regulatory capital requirements. To the extent that these regulations force financial institutions to internalize the externalities created by their potential insolvency (including systemic risk externalities), the incentives to engage in regulatory capital arbitrage will persist. Financial institutions employ a range of complex transactions and structures, including securitization, to engage in regulatory capital arbitrage. The article briefly sketches how capital regulations and regulatory capital arbitrage have evolved in dialectical fashion. This article concludes by describing and evaluating two broad approaches to dealing with the dynamic and unstable nature of capital rules (i.e. their constant erosion by regulatory capital arbitrage): simple, broad brush rules (such as simple and large increases in regulatory capital levels) and more regulatory engineering that attempts to keep pace with the increasing complexity of financial institution balance sheets and transactions

THE GAME BETWEEN SECURITIZATION AND CAPITAL REGULATION

In the implement of Basel Accord, problems like regulatory capital arbitrage came up for the shortcomings of the accord. Securitization and other financial innovations have provided opportunities to reduce the regulatory capital requirements with little or no reduction in the overall economic risks. The possibility of regulatory capital arbitrage was caused by the inaccurate classification of the risks of different assets under Basel Accord. One of the routine methods is asset securitization, which will create value for banks while damaging the effect of the capital adequacy ratio as a prudential policy instrument. To deal with RCA (regulatory capital arbitrage), the most important is to match the regulatory capital to different assets and cut the motivation from the source so as to unify regulatory capital and economic capital. Key words: Capital Adequacy Ratio, Asset Securitization, Arbitrage Regulatio

The Stability of RMB Exchange Rate and Its Perfection of Present Exchange Rate Mechanism

In the implement of Basel Accord, problems like regulatory capital arbitrage came up for the shortcomings of the accord. Securitization and other financial innovations have provided opportunities to reduce the regulatory capital requirements with little or no reduction in the overall economic risks. The possibility of regulatory capital arbitrage was caused by the inaccurate classification of the risks of different assets under Basel Accord. One of the routine methods is asset securitization, which will create value for banks while damaging the effect of the capital adequacy ratio as a prudential policy instrument. To deal with RCA (regulatory capital arbitrage), the most important is to match the regulatory capital to different assets and cut the motivation from the source so as to unify regulatory capital and economic capital. Key words: Capital Adequacy Ratio, Asset Securitization, Arbitrage Regulatio

What drives bank securitisation? The Spanish experience.

This paper analyses the reasons why Spanish banks securitised in the period 2000–2007 on such a large scale that Spain has become the European country with the second-largest issuance volume after the UK. The results obtained by applying a logistic regression model to a sample of 408 observations indicate that liquidity and the search for improved performance are the decisive factors in securitisation. We find no evidence to support hypotheses regarding credit risk transfer and regulatory capital arbitrage. Our study also presents a more detailed analysis that differentiates between asset and liability securitisation programmes.Securitisation; ABS; CDO; Credit risk transfer; Regulatory capital arbitrage;

Tech, Regulatory Arbitrage, and Limits

Regulatory arbitrage refers to structuring activity to take advantage of gaps or differences in regulations or laws. Examples include Facebook modifying its terms and conditions to reduce the exposure of its user data to strict European privacy laws, and Uber and other platform companies organizing their affairs to categorize workers as non-employees. This essay explores the constraints and limits on regulatory arbitrage through the lens of the technology industry, known for its adaptiveness and access to strategic resources. Specifically, the essay explores social license and the bundling of laws and resources as constraining forces on regulatory arbitrage, and the legal mismatch that can arise from new business models and innovations as a key area in which the limits of regulatory arbitrage can be observed

Credit card securitization and regulatory arbitrage

This paper explores the motivations and desirability of off-balance-sheet financing of credit card receivables by banks. We explore three related issues: the degree to which securitizations result in the transfer of risk out of the originating bank, the extent to which securitization permits banks to economize on capital by avoiding regulatory minimum capital requirements, and whether banks' avoidance of minimum capital regulation through securitization with implicit recourse has been undesirable from a regulatory standpoint. We show that this intermediation structure could be motivated either by desirable efficient contracting in the presence of asymmetric information or by undesirable safety net abuse. We find that securitization results in some transfer of risk out of the originating bank but that risk remains in the securitizing bank as a result of implicit recourse. Clearly, then, securitization with implicit recourse provides an important means of avoiding minimum capital requirements. We also find, however, that securitizing banks set their capital relative to managed assets according to market perceptions of their risk and seem not to be motivated by maximizing implicit subsidies relating to the government safety net when managing their risk. Thus, the evidence is more consistent with the efficient contracting view of securitization with implicit recourse than with the safety net abuse view. Concerns expressed by policymakers about this form of capital requirement avoidance appear to be overstated. ; Also issued as Payment Cards Center Discussion Paper No. 03-05Credit cards

Credit default swaps, regulatory arbitrage and banking regulation

This paper analyzes theoretically the impact of credit default swaps (CDS) on the regulatory capital required in a banking system. We develop a simple capital requirement model with and without CDS, which shows that CDS reduces banking system capital ratio. The model also highlights the regulator’s ability to use prudential ratios at their disposal to limit regulatory arbitrage. An enhancing of this model via a reduced-form default model, inspired by Duffie and Singleton (1999), shows the possibility for banks facing the regulator’s desire to reduce regulatory arbitrage, to affect the level of regulatory capital savings. This becomes possible if the CDS market gives them the opportunity to influence some parameters related to the CDS market value: the default intensity, the partial recovery rate, the spread, the risk-free rate. Therefore, in addition to its intervention on prudential ratios, the regulator should limit regulatory arbitrage effectively by intervening also in the CDS market to counter the strategic use of CDS by banks. Key words: bank, prudential regulation, regulatory arbitrage, credit default swaps. JEL Classification: G19, G28, G3

Diversity and Arbitrage in a Regulatory Breakup Model

In 1999 Robert Fernholz observed an inconsistency between the normative assumption of existence of an equivalent martingale measure (EMM) and the empirical reality of diversity in equity markets. We explore a method of imposing diversity on market models by a type of antitrust regulation that is compatible with EMMs. The regulatory procedure breaks up companies that become too large, while holding the total number of companies constant by imposing a simultaneous merge of other companies. The regulatory events are assumed to have no impact on portfolio values. As an example, regulation is imposed on a market model in which diversity is maintained via a log-pole in the drift of the largest company. The result is the removal of arbitrage opportunities from this market while maintaining the market's diversity.Comment: 21 page