With respect to activities that are permitted, prudential regulation can indirectly influence corporate decisions on risk-taking by requiring minimum amounts of capital to be held by the regulated firms.
But, fundamental as they are to contemporary prudential regulation, capital requirements – particularly static, backward-looking standards – will necessarily be somewhat imprecisely related to the range of actual risk incident to specific assets or transactions within the various risk categories established by the capital regime. In fact, the capital regime may itself invite arbitrage, as firms look to maximize risk-taking within regulatory risk categories.