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THE ROLE OF REGULATORY ARBITRAGE IN U.S. BANKS' INTERNATIONAL FLOWS: BANK‐LEVEL EVIDENCE
Author(s) -
Temesvary Judit
Publication year - 2018
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12579
Subject(s) - arbitrage , profitability index , capital requirement , business , financial system , bank regulation , capital (architecture) , monetary economics , economics , international economics , finance , incentive , market economy , archaeology , history
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 F3, F4, G2)