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

22 Pages Posted: 26 Sep 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: October 2018

Abstract

I study the prevalence and profitability of regulatory arbitrage in U.S. banks' foreign activities. I analyze a publicly available bank‐level data set on bilateral lending flows to 75 countries over 2003–2013. U.S. banks' affiliates lend less to borrowers in host countries with stricter bank capital 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.

JEL Classification: F3, F4, G2

Suggested Citation

Temesvary, Judit, The Role of Regulatory Arbitrage in U.S. Banks' International Flows: Bank‐Level Evidence (October 2018). Economic Inquiry, Vol. 56, Issue 4, pp. 2077-2098, 2018, Available at SSRN: https://ssrn.com/abstract=3240841 or http://dx.doi.org/10.1111/ecin.12579

Judit Temesvary (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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