Why Don’t All Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities

Nicole M. Boyson, Ruediger Fahlenbrach and René Stulz
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Nicole M. Boyson: Northeastern University - D’Amore-McKim School of Business

No 14-21, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We investigate why only some banks use regulatory arbitrage. We predict that banks wanting to be riskier than allowed by capital regulations (constrained banks) use regulatory arbitrage while others do not. We find support for this hypothesis using trust preferred securities (TPS) issuance, a form of regulatory arbitrage available to almost all U.S. banks from 1996 to Dodd-Frank. We also find support for predictions that constrained banks are riskier, perform worse during the crisis, and use multiple forms of regulatory arbitrage. We show that neither too-big-to-fail incentives nor misaligned managerial incentives are first-order determinants of this type of regulatory arbitrage.

Keywords: Regulatory arbitrage; bank capital requirements; quality of bank capital (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2014-03, Revised 2015-12
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Related works:
Journal Article: Why Don't All Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust-Preferred Securities (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1421

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