Regulatory Arbitrage and Global Push Factors

51 Pages Posted: 22 Jan 2021 Last revised: 24 Jan 2021

See all articles by Uluc Aysun

Uluc Aysun

University of Central Florida

Michael Tseng

University of Central Florida

Date Written: January 16, 2021

Abstract

This paper identifies two theoretical mechanisms that relate the regulatory arbitrage behavior of internationally active banks (IABs) to global financial conditions. According to the first mechanism, regulation becomes more binding during adverse financial conditions. Under these conditions, IABs face higher compliance costs in more regulated markets. According to the second mechanism, higher regulation suppresses the degree of risk-taking and asset returns so that highly-regulated nations are more insulated from global financial risk. These results are reversed in less-regulated nations. We use a panel of bilateral BIS banking statistics and a unique empirical strategy to find that the first of the two theoretical mechanisms above is more prevalent. Specifically, IABs expand their claims more rapidly in less-regulated nations when global perception of financial risk is higher. The direction of arbitrage is reversed under loose conditions. This evidence is corroborated by the inferences from a structural vector autoregressive model fitted to data from individual countries.

Keywords: Push factors, Global banks, BIS statistics, Regulation, Arbitrage

JEL Classification: F44, G11, G15, G21

Suggested Citation

Aysun, Uluc and Tseng, Michael, Regulatory Arbitrage and Global Push Factors (January 16, 2021). Available at SSRN: https://ssrn.com/abstract=3767504 or http://dx.doi.org/10.2139/ssrn.3767504

Uluc Aysun

University of Central Florida

4000 Central Florida Blvd
Orlando, FL 32816-1400
United States

Michael Tseng (Contact Author)

University of Central Florida ( email )

4000 Central Florida Blvd
Orlando, FL 32816-1400
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
11
Abstract Views
143
PlumX Metrics