Why Do 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

Working Paper Series from Ohio State University, Charles A. Dice Center for Research in Financial Economics

Abstract: We propose a theory of regulatory arbitrage by banks and test it using trust preferred securities (TPS) issuance. We assume that banks have an optimal capital structure that depends on their business model. If a bank's optimal capital structure meets regulatory capital requirements with a sufficient buffer, the bank is unconstrained by these requirements. We expect that unconstrained banks will not issue TPS, that constrained banks will issue TPS and engage in other forms of regulatory arbitrage, and that TPS banks will be riskier than other banks with the same amount of regulatory capital. Our empirical evidence supports these predictions.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2014-11
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Citations: View citations in EconPapers (5)

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Working Paper: Why Do Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities (2014)
Working Paper: Why Do Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:ohidic:2014-01

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