94. In this paper, the term "supervisory arbitrage" is used to refer to the shifting of certain activities or positions within a conglomerate, either to avoid a situation of relatively more strict prudential supervision by one set of supervisors compared to another, or to avoid supervision altogether (by transferring the activities or positions to a non­regulated entity). Clearly, more cooperation between supervisors and access to information on non­regulated entities are important prerequisites to any attempt to suppress supervisory arbitrage.

95. The Tripartite Group believes that, in practice, instances of supervisory arbitrage in relation to core activities is, in most jurisdictions, relatively rare. Nevertheless, the very fact that there is the scope for arbitrage in certain areas is of concern to supervisors and it can be argued that the only way to be certain of preventing it is to ensure that the same types of risk throughout a group are covered by capital which is identical in terms of amount and structure, irrespective of the location of the supervised company in which the risks are situated (the principle of same business, same risk, same rules). A harmonisation of banking, securities and insurance regulation would be necessary in order to achieve that and most members of the Tripartite Group do not consider such an approach to be realistic at this time. A more pragmatic (but limited) approach might be to establish an "early warning system" whereby supervisors would be required to inform each other of the establishment of any part of a conglomerate within their jurisdiction and of any significant transfer of assets, liabilities or contingent liabilities (or activities in general) between different parts of a conglomerate. This would enable supervisors to identify possible instances of regulatory arbitrage and to take appropriate action at an early stage. The problems caused by unregulated companies (such as reinsurers) in other countries probably need to be tackled in the first instance through the monitoring of intra­group transactions by solo regulators. However, methods for valuing assets and liabilities in subsidiaries (particularly those established in other jurisdictions) also need to be carefully considered by the regulator of the parent or, where the parent itself is unregulated, by the regulator of the dominant group entity.