The attempt to take advantage of a gap in the regulatory system of a given country. It also includes exploitation of discrepancies in different regulatory systems (cross-border regulatory arbitrage). For example, a financial institution may try to avoid a specific regulation in carrying out a financial deal or transaction, either for cost considerations (avoidance of regulatory costs) or for efficiency (avoidance of regulatory inefficiency).
Regulatory arbitrage may take the form of using special purpose vehicles (SPVs) to reduce risk provisioning (by purchasing structured products off-balance sheet).
