THE GAME BETWEEN SECURITIZATION AND CAPITAL REGULATION

Abstract

In the implement of Basel Accord, problems like regulatory capital arbitrage came up for the shortcomings of the accord. Securitization and other financial innovations have provided opportunities to reduce the regulatory capital requirements with little or no reduction in the overall economic risks. The possibility of regulatory capital arbitrage was caused by the inaccurate classification of the risks of different assets under Basel Accord. One of the routine methods is asset securitization, which will create value for banks while damaging the effect of the capital adequacy ratio as a prudential policy instrument. To deal with RCA (regulatory capital arbitrage), the most important is to match the regulatory capital to different assets and cut the motivation from the source so as to unify regulatory capital and economic capital.
Key words: Capital Adequacy Ratio, Asset Securitization, Arbitrage Regulation