PT - JOURNAL ARTICLE AU - Tobias Berg AU - Bernhard Gehra AU - Michael Kunisch TI - A Certification Model for Regulatory Arbitrage: <em>Will Regulatory Arbitrage Persist under Basel III?</em> AID - 10.3905/jfi.2011.21.2.039 DP - 2011 Sep 30 TA - The Journal of Fixed Income PG - 39--56 VI - 21 IP - 2 4099 - https://pm-research.com/content/21/2/39.short 4100 - https://pm-research.com/content/21/2/39.full AB - Based on anecdotal evidence, regulatory arbitrage was a major catalyst of the recent financial crisis. However, regulatory arbitrage is both theoretically and empirically not yet adequately explored. This article develops a theoretical model of regulatory arbitrage. The model is based on a set up where regulatory risk weights act as a certification of the riskiness of a bank’s opaque balance sheet. When regulatory risk weights are misspecified, regulatory arbitrage for the (informed) banks exists. The authors empirically demonstrate that regulatory arbitrage opportunities between the trading business and the loan business existed under the Basel I and Basel II framework and are likely to subsist under the Basel III regime. Their analysis is based on the so-called asset correlation parameter that plays a crucial role for capital requirements under Basel II and Basel III.TOPICS: Exchanges/markets/clearinghouses, VAR and use of alternative risk measures of trading risk, developed markets [Europe]