Kwak states:
Regulatory capital arbitrage happens because, all other things being equal, banks would like to hold less rather than more capital….
How does regulatory capital arbitrage work? There are many strategies, but the most straightforward to describe and to implement is securitization….
The magic is that by getting sufficiently high credit ratings for the senior tranches, the bank can lower the risk weights on those assets, thereby lowering the amount of capital it has to hold for those tranches….
Read the entire posting at http://baselinescenario.com/2009/05/30/regulatory-capital-arbitrage-for-beginners/
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