Etymology: French, from Middle French, arbitration, from Old French, from arbitrer to render judgment, from Latin arbitrari, from arbitr-, arbiter
1 : the nearly simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies 2 : the purchase of the stock of a takeover target especially with a view to selling it profitably to the raider
Economist.com definition of regulatory arbitrage
Exploiting loopholes in REGULATION , and perhaps making the regulation useless in the process. This is often done by international investors that use DERIVATIVES to find ways around a country’s financial regulations.
BCM International Regulatory Analytics LLC What happens when information flows from central points across borders? Data Provider 8 Data Provider 7 Data Provider 6 Data Provider 5 Data Provider 4 Data Provider 3 Data Provider 2 Data Provider 1 Data Provider 9 Central data
“ The US dollar shortage in global banking and the international policy response ,” BIS Working Paper no. 291 (Oct. 2009)
Growth in European and Japanese banks’ USD assets produced structural USD funding requirements that could not be met when money, interbank & swap markets shut down.
Figure 5: “the major European banks’ US dollar funding gap had reached $1.0-1.2 trillion by mid-2007. Until the onset of the crisis, European banks had met this need by tapping the interbank market ($432 billion) and by borrowing from central banks ($386 billion) and used FX swaps ($315 billion) to convert (primarily) domestic currency funding into dollars.”
Currency & maturity mismatches “can be understood only by looking at banks’ worldwide positions consolidated across all office locations.”
Counterparty sector breakdown in BIS banking stats “can serve as a proxy for maturity transformation and, hence, funding risk, since the maturity of positions is likely to vary systematically with the type of counterparty.”
“ Demand deposits held by households, for instance, are a stable source of funding with a long effective maturity.” footnote 16