The Role of Regulation in Cross-Border Bank Acquisitions: Is it Really a ‘Race to the Bottom’?

Abstract:     
We study how differences in bank regulation influence cross-border bank acquisition flows, share price reactions to cross-border deal announcements, and post-acquisition bank performance. Using a sample of 5,125 domestic and 793 majority cross-border deals announced between 1995 and 2008, we find that cross-border bank acquisition flows involve primarily acquirers from countries with stronger supervision and stricter capital requirements than those of their targets. This finding is consistent with a form of “regulatory arbitrage” that facilitates a destructive “race to the bottom” in bank regulations in which national regulators become less able to constrain excess risk-taking. However, a target bank’s abnormal returns around the deal announcements are higher when acquirers come from countries with more restrictive bank regulatory environments even after accounting for the acquirer’s attributes, which implies a more benign motive for regulatory arbitrage. Deals involving high-risk acquirers from countries with tougher capital requirements are associated with more adverse share-price reactions. Finally, we uncover a reduction in risk-taking following acquisition completion for acquirers in cross-border deals involving targets in weaker regulatory regimes, casting further doubt on the harmful effects of regulatory arbitrage in cross-border bank acquisitions.

Number of Pages in PDF File: 50

Keywords: Cross-border mergers and acquisitions; financial institutions; bank regulation.

JEL Classification: G21; G28; G34; G38

working papers series