Editing Arbitrage (section)

===Regulatory arbitrage===
{{details|Jurisdictional arbitrage}}
Regulatory arbitrage "is an avoidance strategy of regulation that is exercised as a result of a regulatory inconsistency".<ref>{{cite book |doi=10.1007/978-3-319-54891-3_5|chapter=What is and What is not Regulatory Arbitrage? A Review and Syntheses|title=Financial Markets, SME Financing and Emerging Economies|pages=71–94|year=2017|last1=Willesson|first1=Magnus|isbn=978-3-319-54890-6}}</ref> In other words, where a regulated institution takes advantage of the difference between its real (or economic) [[risk]] and the regulatory position. For example, if a bank, operating under the [[Basel I]] accord, has to hold 8% capital against [[default risk]], but the real risk of default is lower, it is profitable to [[Securitisation|securitise]] the loan, removing the low-risk loan from its portfolio. On the other hand, if the real risk is higher than the regulatory risk then it is profitable to make that loan and hold on to it, provided it is priced appropriately. Regulatory arbitrage can result in parts of entire businesses being unregulated as a result of the arbitrage.

This process can increase the overall riskiness of institutions under a risk insensitive regulatory regime, as described by [[Alan Greenspan]] in his October 1998 speech on [http://www.ny.frb.org/research/epr/98v04n3/9810gree.pdf The Role of Capital in Optimal Banking Supervision and Regulation].

The term "Regulatory Arbitrage" was used for the first time in 2005 when it was applied by Scott V. Simpson, a partner at law firm Skadden, Arps, to refer to a new defence tactic in hostile mergers and acquisitions where differing takeover regimes in deals involving multi-jurisdictions are exploited to the advantage of a target company under threat.

In economics, regulatory arbitrage (sometimes, tax arbitrage) may refer to situations when a company can choose a nominal place of business with a regulatory, legal or tax regime with lower costs. This can occur particularly where the business transaction has no obvious physical location. In the case of many financial products, it may be unclear "where" the transaction occurs.

Regulatory arbitrage can include restructuring a bank by outsourcing services such as IT. The outsourcing company takes over the installations, buying out the bank's assets and charges a periodic service fee back to the bank. This frees up cashflow usable for new lending by the bank. The bank will have higher IT costs, but counts on the multiplier effect of [[money creation]] and the interest rate spread to make it a profitable exercise.

Example:
Suppose the bank sells its IT installations for US$40 million. With a reserve ratio of 10%, the bank can create US$400 million in additional loans (there is a time lag, and the bank has to expect to recover the loaned money back into its books). The bank can often lend (and securitize the loan) to the IT services company to cover the acquisition cost of the IT installations. This can be at preferential rates, as the sole client using the IT installation is the bank. If the bank can generate 5% interest margin on the 400 million of new loans, the bank will increase interest revenues by 20 million. The IT services company is free to leverage their balance sheet as aggressively as they and their banker agree to. This is the reason behind the trend towards outsourcing in the financial sector. Without this money creation benefit, it is actually more expensive to outsource the IT operations as the outsourcing adds a layer of management and increases overhead.

According to PBS ''Frontline''<nowiki/>'s 2012 four-part documentary, "Money, Power, and Wall Street", regulatory arbitrage, along with asymmetric bank lobbying in Washington and abroad, allowed investment banks in the pre- and post-2008 period to continue to skirt laws and engage in the risky proprietary trading of opaque derivatives, swaps, and other credit-based instruments invented to circumvent legal restrictions at the expense of clients, government, and publics.

Due to the Affordable Care Act's expansion of Medicaid coverage, one form of Regulatory Arbitrage can now be found when businesses engage in "Medicaid Migration", a maneuver by which qualifying employees who would typically be enrolled in company health plans elect to enroll in Medicaid instead. These programs that have similar characteristics as insurance products to the employee, but have radically different cost structures, resulting in significant expense reductions for employers.<ref>{{cite news|title=What is Medicaid migration and how does it apply to brokers?|date=June 25, 2014|url=http://www.benefitnews.com/blog/beadvised/what-is-medicaid-migration-and-how-does-it-apply-to-brokers-2742350-1.html|work=Employee Benefit News}}</ref>