Foreign Investment, Regulatory Arbitrage, and the Risk of U.S. Banking Organizations

60 Pages Posted: 27 Mar 2017 Last revised: 21 Sep 2017

See all articles by W. Scott Frame

W. Scott Frame

Federal Reserve Bank of Dallas

Atanas Mihov

Federal Reserve Banks - Federal Reserve Bank of Richmond

Leandro Sanz

Federal Reserve Banks - Federal Reserve Bank of Richmond

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-03-01

Abstract

This study investigates the implications of cross-country differences in banking regulation and supervision for the international subsidiary locations and risk of U.S. bank holding companies (BHCs). We find that U.S. BHCs are more likely to operate subsidiaries in countries with weaker regulation and supervision and that such location decisions are associated with elevated BHC risk and higher contribution to systemic risk. The quality of BHCs’ internal controls and risk management play an important role in these location choices and risk outcomes. Overall, our study suggests that U.S. banking organizations engage in cross-country regulatory arbitrage with potentially adverse consequences.

Keywords: regulation, supervision, bank holding companies, cross-border operations, subsidiary locations, risk, systemic risk

JEL Classification: G15, G21, G28

Suggested Citation

Frame, W. Scott and Mihov, Atanas and Sanz, Leandro, Foreign Investment, Regulatory Arbitrage, and the Risk of U.S. Banking Organizations (2017-03-01). FRB Atlanta Working Paper No. 2017-2. Available at SSRN: https://ssrn.com/abstract=2940587

W. Scott Frame (Contact Author)

Federal Reserve Bank of Dallas ( email )

2200 N Pearl Street
Dallas, TX 75201
United States
214-922-6984 (Phone)

Atanas Mihov

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Leandro Sanz

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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