The Role of Regulatory Arbitrage in U.S. Banks' International Flows: Bank-Level Evidence

48 Pages Posted: 27 Mar 2015 Last revised: 26 Feb 2018

See all articles by Judit Temesvary

Judit Temesvary

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: February 25, 2018

Abstract

I study the prevalence and profitability of regulatory arbitrage in U.S. banks foreign activities. I analyze a publicly available bank-level dataset on bilateral lending flows to 75 countries over 2003-2013. U.S. banks lend less to borrowers in host countries with stricter bank regulations, and are less likely to maintain affiliates in such countries. Banks substitute from (host-regulated) affiliate toward (U.S.-regulated) cross-border lending in hosts with strict bank capital rules. This is particularly so for low-capitalized banks with lower foreign ownership shares. Banks that reduce their exposure to stricter host capital rules are more profitable in foreign activities.

Keywords: International bank lending, Cross-border regulatory arbitrage, Foreign market entry, Capital regulations

JEL Classification: F38, F42, G15, G28

Suggested Citation

Temesvary, Judit, The Role of Regulatory Arbitrage in U.S. Banks' International Flows: Bank-Level Evidence (February 25, 2018). Available at SSRN: https://ssrn.com/abstract=2585464 or http://dx.doi.org/10.2139/ssrn.2585464

Judit Temesvary (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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