Abstract
Scholars of different disciplines use the concept of regulatory arbitrage to describe situations in which economic agents structure their activities to navigate between different levels of regulation because the latter are associated with different levels of costs and benefits. At the roots, regulatory arbitrage therefore is a hybrid concept: arbitrage brings in the economic, regulation the legal perspective. Against a law and finance background, this chapter argues that realising the conceptual overlap of these two perspectives is highly productive not only for analysing regulatory arbitrage, but also to guide our thinking on how to manage and evaluate this phenomenon. So far, however, the concept of regulatory arbitrage has been more often used than analysed and conceptual analysis remains patchy. For communicating and researching this topic that is unhelpful. This chapter therefore works out a conceptual framework of regulatory arbitrage and shows how this connects and extends previous research.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Notes
- 1.
Leyshon (1992), p. 251 (references omitted).
- 2.
- 3.
Kay (2016), p. 115.
- 4.
Partnoy (1997), p. 227.
- 5.
- 6.
Zingales (2015), p. 1353.
- 7.
Cf. supra quotation accompanying note 1 (speaking of “regulatory arbitrage”).
- 8.
Cf. Willesson (2017), pp. 77–81 (providing an overview of different definitions).
- 9.
Wittgenstein (1984), sec. 43.
- 10.
See Coffee (2013), p. 1260.
- 11.
See supra text accompanying note 1.
- 12.
See Adrian and Ashcraft (2012), p. 13.
- 13.
See Goodhart (2008).
- 14.
Cf. Stekeler (2014), pp. 174–176.
- 15.
- 16.
- 17.
- 18.
French et al. (2009), p. 290.
- 19.
Fleischer (2010), p. 230.
- 20.
In a similar vein, Barry (2010), p. 74.
- 21.
Kane (1988), p. 333.
- 22.
- 23.
- 24.
Stiglitz (2009), p. 313.
- 25.
Weber (1894), p. 77.
- 26.
- 27.
Kane (1988), p. 333 (emphasis omitted).
- 28.
Partnoy (2019), p. 1036.
- 29.
See supra text accompanying note 14.
- 30.
See supra text accompanying note 22.
- 31.
Zeitler (2012), p. 678.
- 32.
For such an analysis, see Independent Commission on Banking (2011), chap. 5.
- 33.
See supra text following note 30.
- 34.
Cf. Hardie and MacKenzie (2012).
- 35.
- 36.
Kane (2014), p. 775.
- 37.
See infra text following note 48.
- 38.
Cf. supra text following note 13.
- 39.
Cf. supra text accompanying note 30.
- 40.
Schanze (1995), p. 166.
- 41.
Cf. Schäfer (1995), p. 180.
- 42.
Cf. Mueller (1958).
- 43.
- 44.
See supra text accompanying note 14.
- 45.
See Akerlof and Shiller (2015).
- 46.
- 47.
- 48.
See infra text accompanying note 69.
- 49.
- 50.
Cf. Hayek (1945), p. 530.
- 51.
- 52.
- 53.
- 54.
- 55.
Coffee (2013), p. 1269.
- 56.
Riles (2014), pp. 77–83.
- 57.
Cf. supra text following note 29.
- 58.
Cf. Kessler and Wilhelm (2013), pp. 252–255.
- 59.
- 60.
Cf. MacKenzie (2009), pp. 127–129, 134–35.
- 61.
McBarnet and Whelan (1991), pp. 865–868.
- 62.
- 63.
- 64.
See supra text accompanying note 14 and 44.
- 65.
Kay (2016), p. 117.
- 66.
McBarnet and Whelan (1991), p. 857.
- 67.
Cf. supra text accompanying note 36.
- 68.
Stiglitz (2010), pp. 82–83.
- 69.
See supra text accompanying note 48.
- 70.
- 71.
- 72.
See Kay (2016), p. 117; cf. supra text accompanying note 32.
- 73.
- 74.
- 75.
See supra text accompanying note 23–29.
- 76.
In a similar vein, Partnoy (2019), p. 1035.
- 77.
Knoll (2002), p. 63.
- 78.
See Acharya et al. (2020).
- 79.
See supra text following note 1.
- 80.
Jiang (2015), p. 3.
- 81.
See Shen (2015).
- 82.
See generally Heath (2011).
- 83.
- 84.
See references in notes 71 and 83.
- 85.
- 86.
- 87.
Ford (2017), p. 141.
- 88.
See Grossman and Stiglitz (1980), p. 393.
- 89.
Akram et al. (2009), p. 1742.
- 90.
See supra text accompanying note 36 and 82.
- 91.
References
Acharya V, Qian J, Su Y, Yang Z (2020) In the shadow of banks: wealth management products and issuing banks’ risk in China. Social Science Research Network, Rochester
Adrian T, Ashcraft AB (2012) ‘Shadow Banking Regulation’ (Federal Reserve Bank of New York) Staff Report. No. 559
Akerlof GA, Shiller RJ (2015) Phishing for phools: the economics of manipulation and deception. Princeton University Press, Princeton
Akram QF, Rime D, Sarno L (2009) Does the law of one price hold in international financial markets? Evidence from tick data. J Bank Finance 33:1741–1754
Bar-Gill O (2006) The market for corporate law. J Inst Theoret Econ (JITE) 162:134–160
Barry J (2010) On regulatory arbitrage. Texas Law Rev 89:69–78
Black J (1995) ‘Which arrow?’ Rule type and regulatory policy. Public Law:94–117
Black J (2011) The rise, fall and fate of principles based regulation. In: Alexander K, Moloney N (eds) Law reform and financial markets. Edward Elgar, Cheltenham, pp 3–34
Bodie Z (2019) Robert C. Merton and the science of finance. Ann Rev Finance Econ 11:1–20
Braudel F (1997) Die Dynamik des Kapitalismus, 3rd edn. Klett-Cotta, Stuttgart
Cary WL (1973) Federalism and corporate law: reflections upon Delaware. Yale Law J 83:663–705
Casey J-P, Lannoo K (2009) The Mifid revolution. Cambridge University Press, Cambridge
Coffee J (2013) Extraterritorial financial regulation: why E.T. can’t come home. Cornell Law Rev 99:1259–1302
Eichengreen B (2010) International financial regulation after the crisis. Daedalus 139:107–114
Finnerty J (1985) Zero coupon bond arbitrage: an illustration of the regulatory dialectic at work. Finance Manage 14:13–17
Fleischer V (2010) Regulatory arbitrage. Texas Law Rev 89:227–289
Ford C (2017) Innovation and the state: finance, regulation, and justice. Cambridge University Press, New York
French S, Leyshon A, Thrift N (2009) A very geographical crisis: the making and breaking of the 2007–2008 financial crisis. Cambridge J Regions Econ Soc 2:287–302
G-20 (2008) Washington-Declaration of the Summit on Financial Markets and the World Economy. Washington
Gerding EF (2016) The dialectics of bank capital: regulation and regulatory capital arbitrage. Washburn Law J 55:357–384
Goodhart C (2008) The boundary problem in financial regulation. Natl Inst Econ Rev 206:48–55
Greenberg RD (1983) The Eurodollar market: the case for disclosure. California Law Rev 71:1492–1515
Grossman SJ, Stiglitz JE (1980) On the impossibility of informationally efficient markets. Am Econ Rev 70:393–408
Haldane A (2012) The Dog and the Frisbee: Speech at the Federal Reserve Bank of Kansas City’s 366th Economic Policy Symposium
Hardie I, MacKenzie D (2012) The material sociology of arbitrage. In: Knorr-Cetina K, Preda A (eds) The Oxford handbook of the sociology of finance. Oxford University Press, Oxford, pp 187–202
Hayek FA (1945) The use of knowledge in society. Am Econ Rev 35:519–530
Heath J (2011) Following the rules: practical reasoning and deontic constraint. Oxford University Press, Oxford
Independent Commission on Banking (Great Britain) (2011) Final report: recommendations, London
Jiang W (2015) The future of shadow banking in China. Social Science Research Network, Rochester
Junker A (2019) Internationales Privatrecht, 3rd edn. C.H. Beck, München
Kane E (1981) Accelerating inflation, technological innovation, and the decreasing effectiveness of banking regulation. J Finance 36:355–367
Kane E (1983) Policy implications of structural changes in financial markets. Am Econ Rev 73:96–100
Kane E (1988) Interaction of financial and regulatory innovation. Am Econ Rev 78:328–344
Kane E (1993) Reflexive adaptation of business to regulation and regulation to business. Law Policy 15:179–189
Kane E (2014) Shadowy banking: theft by safety net. Yale J Regul 31:773–807
Kay J (2016) Other people’s money: masters of the universe or servants of the people? Profile Books, London
Kessler O, Wilhelm B (2013) Financialization and the three utopias of shadow banking. Compet Change 17:248–264
Knoll MS (2002) Put-call parity and the law. Cardozo Law Rev 24:61–91
Knoll MS (2008) The ancient roots of modern financial innovation: the early history of regulatory arbitrage. Oregon Law Rev 87:93–116
Lamont OA, Thaler RH (2003) Anomalies: the law of one price in financial markets. J Econ Perspect 17:191–202
Leyshon A (1992) The transformation of regulatory order: regulating the global economy and environment. Geoforum 23:249–267
Macey J (1995) Derivative instruments: lessons for the regulatory state. J Corp Law 21:69–93
Macey J (2003) Regulatory globalization as a response to regulatory competition. Emory Law J 52:1353–1379
MacKenzie D (2009) Material markets. Oxford University Press, Oxford
McBarnet D (2010) Financial engineering or legal engineering? Legal work, legal integrity and the banking crisis. University of Edinburgh, Edinburgh
McBarnet D, Whelan C (1991) The elusive spirit of the law: formalism and the struggle for legal control. Mod Law Rev 54:848–873
McBarnet D, Whelan C (1992) International corporate finance and the challenge of creative compliance. In: Fingleton J, Schoenmaker D (eds) The internationalisation of capital markets and the regulatory response. Graham & Trotman, London, pp 129–142
Merton RC (1995) A functional perspective of financial intermediation. Finance Manage 24:23–41
Mosebach M (2000) Regulation avoidance in the banking industry: the case of 364 day lines of credit. J Int Finance Manage Account 11:198–206
Möslein F (2014) Finanzinnovation und Rechtsordnung: Eine Einführung. In: Möslein F (ed) Finanzinnovation und Rechtsordnung: Gestaltung, unternehmerischer Einsatz und Marktregulierung. Schulthess, Zürich, pp 3–44
Mueller GE (1958) The Hegel legend of ‘thesis-antithesis-synthesis. J Hist Ideas 19:411–414
Mullineux AW (2010) Financial innovation and social welfare. J Finance Regul Compliance 18:243–256
Nabilou H (2017) Regulatory arbitrage and hedge fund regulation: the need for a transnational response. Fordham J Corp Finance Law 22:557–604
Partnoy F (1997) Financial derivatives and the costs of regulatory arbitrage. J Corp Law 22:211–256
Partnoy F (2019) The law of two prices: regulatory arbitrage revisited. Georgetown Law Journal 107:1017–1044
Pistor K (2019) The code of capital: how the law creates wealth and inequality. Princeton University Press, Princeton
Posner RA (1971) Taxation by regulation. Bell J Econ Manage Sci 2:22–50
Riles A (2014) Managing regulatory arbitrage: a conflict of laws approach. Cornell Int Law J 47:63–119
Romano R (1985) Law as a product: some pieces of the incorporation puzzle. J Law Econ Organ 1:225–284
Schäfer HB (1995) Hare and hedgehog revisited: the regulation of markets that have escaped regulated markets: comment. J Inst Theor Econ (JITE) 151:177–181
Schanze E (1995) Hare and hedgehog revisited: the regulation of markets that have escaped regulated markets. J Inst Theor Econ (JITE) 151:162–176
Shah A (1997) Regulatory arbitrage through financial innovation. Account Audit Account J 10:85–104
Shen W (2015) Wealth management products in the context of China’s shadow banking: systemic risks, consumer protection and regulatory instruments. Asia Pac Law Rev 23:91–123
Shleifer A, Vishny RW (1997) The limits of arbitrage. J Finance 52:35–55
Stark J (2019) Law for sale: a philosophical critique of regulatory competition. Oxford University Press, Oxford
Stekeler P (2014) Hegels Phänomenologie des Geistes: ein dialogischer Kommentar. Meiner, Hamburg
Stiglitz JE (2009) Selected works of Joseph E. Stiglitz. Oxford University Press, Oxford
Stiglitz JE (2010) The Stiglitz report: reforming the international monetary and financial systems in the wake of the global crisis. New Press, New York
Story J, Walter I (1997) Political economy of financial integration in Europe: the battle of the systems. MIT Press, Cambridge, MA
Stout LA (1995) Betting the bank: how derivatives trading under conditions of uncertainty can increase risks and erode returns in financial markets. J Corp Law 21:53–68
Tarko V, Farrant A (2019) The efficiency of regulatory arbitrage. Public Choice 181:141–166
Trachtman JP (2000) Regulatory competition and regulatory jurisdiction. J Int Econ Law 3:331–348
Tröger T (2016) How special are they? Targeting systemic risk by regulating shadow banking. In: Lomfeld B, Somma A, Zumbansen P (eds) Reshaping markets: economic governance, the global financial crisis and liberal utopia. Cambridge University Press, Cambridge, pp 185–207
Wallerstein I (1991) Braudel on capitalism, or everything upside down. J Mod Hist 63:354–361
Weber M (1894) Die Börse I. Vandenhoeck & Ruprecht, Göttingen
Willesson M (2017) What is and what is not regulatory arbitrage? A review and syntheses. In: Chesini G, Giaretta E, Paltrinieri A (eds) Financial markets, SME financing and emerging economies. Springer International Publishing, Cham, pp 71–94
Windecker GH (1993) The Eurodollar deposit market: strategies for regulation. Am Univ J Int Law Policy 9:357–384
Wittgenstein L (1984) Philosophische Untersuchungen. In: Tractatus logico-philosophicus, Tagebücher 1914–1916, Philosophische Untersuchungen. Suhrkamp, Frankfurt am Main, pp 225–580
Zeitler FC (2012) Vergessene Ursachen der Banken- und Finanzkrise. Wertpapier-Mitteilungen 66:673–678
Zingales L (2015) Presidential address: does finance benefit society? J Finance 70:1327–1363
Acknowledgement
I am grateful to Hans-Bernd Schäfer and Tobias Tröger for their comments on a draft of this chapter. The support by the Programme for Professor of Special Appointment (Eastern Scholar) at Shanghai Institutions of Higher Learning is acknowledged.
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2021 The Author(s), under exclusive license to Springer Nature Switzerland AG
About this paper
Cite this paper
Coendet, T. (2021). The Concept of Regulatory Arbitrage. In: Mathis, K., Tor, A. (eds) Law and Economics of Regulation. Economic Analysis of Law in European Legal Scholarship, vol 11. Springer, Cham. https://doi.org/10.1007/978-3-030-70530-5_8
Download citation
DOI: https://doi.org/10.1007/978-3-030-70530-5_8
Published:
Publisher Name: Springer, Cham
Print ISBN: 978-3-030-70529-9
Online ISBN: 978-3-030-70530-5
eBook Packages: Law and CriminologyLaw and Criminology (R0)