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

59 Pages Posted: 13 Mar 2014 Last revised: 24 Dec 2015

Nicole M. Boyson

Northeastern University - D’Amore-McKim School of Business

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

René M. Stulz

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

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Date Written: December 14, 2015

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.

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

JEL Classification: G01, G21, G28

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: https://ssrn.com/abstract=2406895 or http://dx.doi.org/10.2139/ssrn.2406895

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 - Ecole Polytechnique Fédérale de Lausanne ( 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

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