Abstract

http://ssrn.com/abstract=2406895
 
 

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


Nicole M. Boyson


Northeastern University - D’Amore-McKim School of Business

Rüdiger Fahlenbrach


Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute

René M. Stulz


Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

December 14, 2015

Charles A. Dice Center Working Paper No. 2014-01
European Corporate Governance Institute (ECGI) - Finance Working Paper No. 457/2015
Fisher College of Business Working Paper No. 2014-03-01
Swiss Finance Institute Research Paper No. 14-21

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.

Number of Pages in PDF File: 59

Keywords: Regulatory arbitrage; bank capital requirements; quality of bank capital

JEL Classification: G01, G21, G28


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Date posted: March 13, 2014 ; Last revised: December 24, 2015

Suggested Citation

Boyson, Nicole M. and Fahlenbrach, Rüdiger and Stulz, René M., Why Don’t All Banks Practice Regulatory Arbitrage? Evidence from Usage of Trust Preferred Securities (December 14, 2015). Charles A. Dice Center Working Paper No. 2014-01; European Corporate Governance Institute (ECGI) - Finance Working Paper No. 457/2015; Fisher College of Business Working Paper No. 2014-03-01; Swiss Finance Institute Research Paper No. 14-21. Available at SSRN: http://ssrn.com/abstract=2406895 or http://dx.doi.org/10.2139/ssrn.2406895

Contact Information

Nicole M. Boyson
Northeastern University - D’Amore-McKim School of Business ( email )
360 Huntington Ave.
Boston, MA 02115
617-373-4775 (Phone)

Rüdiger Fahlenbrach
Ecole Polytechnique Fédérale de Lausanne ( email )
Quartier UNIL-Dorigny
Extranef 211
1015 Lausanne, CH-1015
Switzerland
++41-21-693-0098 (Phone)
++41-21-693-3010 (Fax)
HOME PAGE: http://sfi.epfl.ch/fahlenbrach.html
Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Rene M. Stulz (Contact Author)
Ohio State University (OSU) - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Feedback to SSRN


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