Regulatory Arbitrage and International Bank Flows
61 Pages Posted: 20 Dec 2009 Last revised: 29 Aug 2011
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Regulatory Arbitrage and International Bank Flows
Regulatory Arbitrage and International Bank Flows
Date Written: August 26, 2011
Abstract
We study whether cross-country differences in regulations have affected international bank flows. We find strong evidence that banks have transferred funds to markets with fewer regulations. This form of regulatory arbitrage suggests there may be a destructive “race to the bottom” in global regulations which restricts domestic regulators’ ability to limit bank risk-taking. However, we also find that the links between regulation differences and bank flows are significantly stronger if the recipient country is a developed country with strong property rights and creditor rights. This suggests that while differences in regulations have important influences, that without a strong institutional environment, lax regulations are not enough to encourage massive capital flows.
Keywords: Regulatory Arbitrage, International Bank Flow, Financial Regulation
JEL Classification: G21, G28, G30
Suggested Citation: Suggested Citation
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