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Capital flows and regulatory arbitrage

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Date
2018
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Abstract
Events earlier in the year in Australia show the extent to which cross-border capital flows can arbitrage regulatory hurdles. It appears that in an effort to rein in a burgeoning housing bubble, the Australian central bank, the Reserve Bank of Australia (RBA) has placed caps on bank lending to real estate developers. The policy, aimed largely at curbing purchases of Australian homes by foreigners through domestic borrowing, initially was effective. In addition to foreign speculators, domestic housing developers too were hit hard. Such regulation would have essentially taken the wind out of a domestic housing bubble, had it not been for foreign hedge funds and private equity. Given free capital flows, these foreign entities, which are really shadow banks, stepped in to provide the needed funding, obviously at higher interest rates. At that point of time, the foreign lenders appeared to be making huge profits from the large interest spreads. For both the foreign lenders and the foreign speculators of Australian property, the ability to sidestep the regulation appeared to be a win-win.
Keywords
Capital flows , Regulatory arbitrage , Australia
Citation
Bacha, O. I. (2018, November 12). Capital flows and regulatory arbitrage. The Malaysian Reserve.
Publisher
TMR Media Sdn Bhd
DOI
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