Regulatory Arbitrage and International Bank Flows

HKIMR Working Paper No.15/2012

56 Pages Posted: 31 May 2012

See all articles by Joel F. Houston

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Yue Ma

City University of Hong Kong (CityUHK) - Department of Economics & Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 29, 2012

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.

Suggested Citation

Houston, Joel F. and Lin, Chen and Ma, Yue, Regulatory Arbitrage and International Bank Flows (May 29, 2012). HKIMR Working Paper No.15/2012. Available at SSRN: https://ssrn.com/abstract=2069776 or http://dx.doi.org/10.2139/ssrn.2069776

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Yue Ma (Contact Author)

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cb.cityu.edu.hk/staff/yuema24

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