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Regulatory arbitrage and global push factors

Uluc Aysun () and Michael Tseng ()
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Michael Tseng: University of Central Florida, Orlando, FL

No 2021-01, Working Papers from University of Central Florida, Department of Economics

Abstract: This paper identifies two theoretical mechanisms that relate the regulatory arbitrage behavior of internationally active banks (IABs) to global financial conditions. According to the first mechanism, regulation becomes more binding during adverse financial conditions. Under these conditions, IABs face higher compliance costs in more regulated markets. According to the second mechanism, higher regulation suppresses the degree of risk-taking and asset returns so that highly-regulated nations are more insulated from global financial risk. These results are reversed in less-regulated nations. We use a panel of bilateral BIS banking statistics and a unique empirical strategy to find that the first of the two theoretical mechanisms above is more prevalent. Specifically, IABs expand their claims more rapidly in less-regulated nations when global perception of financial risk is higher. The direction of arbitrage is reversed under loose conditions. This evidence is corroborated by the inferences from a structural vector autoregressive model fitted to data from individual countries.

Keywords: push factors; global banks; BIS statistics; regulation; arbitrage. (search for similar items in EconPapers)
JEL-codes: F44 G11 G15 G21 (search for similar items in EconPapers)
Pages: 51 Pages
Date: 2021-11
New Economics Papers: this item is included in nep-ban, nep-opm and nep-reg
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