Regulatory Arbitrage in Cross-Border Banking Mergers within the EU

35 Pages Posted: 4 Jun 2010 Last revised: 13 Jun 2010

See all articles by Santiago Carbo-Valverde

Santiago Carbo-Valverde

University of Granada

Francisco Rodriguez-Fernandez

University of Granada - Department of Economic Theory and History

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: June 7, 2010

Abstract

Banks are in the business of taking calculated risks. Expanding the geographic footprint of an organization’s profit-making activities changes the geographic pattern of its exposure to loss in ways that are hard for regulators and supervisors to observe. This paper tests and confirms the hypothesis that differences in the size and character of safety-net benefits that are available to banks in individual EU countries help to account for cross-border merger activity. The paper explains how this might have undermined regional stability. If they wish to protect EU taxpayers from potentially destabilizing regulatory arbitrage, central bankers need to develop statistical procedures for assessing the consequences of differences in supervisory strength and weakness in partner countries. We believe that the methods and models used here can help in this task.

Keywords: bank mergers, safety-net subsidies, cross-border banking

JEL Classification: F3,G2,K2

Suggested Citation

Carbo-Valverde, Santiago and Rodriguez-Fernandez, Francisco and Kane, Edward J., Regulatory Arbitrage in Cross-Border Banking Mergers within the EU (June 7, 2010). Available at SSRN: https://ssrn.com/abstract=1619159 or http://dx.doi.org/10.2139/ssrn.1619159

Santiago Carbo-Valverde

University of Granada ( email )

C/Rector López Argueta S/N
Granada, Granada 18071
Spain

Francisco Rodriguez-Fernandez

University of Granada - Department of Economic Theory and History ( email )

Granada
Spain

Edward J. Kane (Contact Author)

Boston College - Department of Finance ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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