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

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. This paper examines how cross-border differences in the stringency of bank regulations affect U.S. banks' international activities. The analysis relies on a unique bank-level dataset on the globally most active U.S. banks' balance sheet as well as their cross-border, foreign affiliate lending and foreign market entry choices in 82 foreign countries in the 2003-2013 period. Results show that U.S. banks are significantly more likely to enter foreign markets with relatively laxer bank capital and disclosure requirements, and exit foreign markets with relatively stricter deposit insurance schemes and more restrictions on activities. Banks substitute away from foreign affiliate lending (via subsidiaries in the foreign country) towards cross-border lending (originating from the U.S.) in foreign countries with more powerful and independent bank regulators and limits on activities. Terms of use: Documents in JEL:F3, F4, G2 Keywords:International bank lending, Cross-border regulatory arbitrage, Foreign market entry and exit, Balance sheet effects

International Banking and Cross-Border Effects of Regulation: Lessons from the United States

“…While we do not find that U.S. banks expand their lending growth, we do not find them contracting their lending growth either, suggesting that foreign policy changes might not be able to impact these banks' local operations. This result contrasts with those in Temesvary (2015), who finds significant responses of U.S. banks' foreign activities to stricter bank regulation in host countries. Part of the divergence in these results may be explained by the use of different cross-country regulatory data and different methodologies for measuring the effect of changes in prudential instruments.…”

A Global Lending Channel Unplugged? Does U.S. Monetary Policy Affect Cross-border and Affiliate Lending by Global U.S. Banks?

“…In these specifications, funding-constrained U.S. banks (at the 25 th percentile of the funding ratio distribution) raise their cross-border flows 1.5 to 2.3 percentage points more than their funding-abundant counterparts, in response to a 100 basis points decrease in perspectives, the documented growth impact of foreign bank inflows (Goldberg (2007)) may provide needed capital in developing countries, and volatility of these inflows induced by U.S. monetary policy could provide a particular challenge for policy makers in those low-income countries. Furthermore, the inflows from foreign banks may induce lower-income countries to offer particularly hospitable regulatory treatment to banks providing such inflows (Temesvary (2017)). …”

The Asymmetric Implementation of the European Banking Union (EBU): Consequences for Financial Stability

“…9 A "race to the bottom" is also analysed in Agai [2015], who considers regulatory arbitrage by banks which can in reality choose their regulators by relocating their headquarters. For empirical evidence on the existence of a "race to the bottom" in US banking, see Buch andDeLong [2008], Carbo-Valdene et al [2012], Houston et al [2012], Onega et al [2014], Karolyi and Taboada [2015], and Temesvary [2015]. For evidence on Europe, see Aiyar, Calomiris, andWieladek [2012], Bremer andFratzscher [2015], or Reinhardt and Sowerbutts [2015].…”