Subsidiary Operations in Offshore Financial Centers and Bank Risk-Taking: International Evidence

Abstract

The last two decades have witnessed a growing trend of traditional onshore banks establishing affiliates and subsidiaries offshore, along with increased globalization and competition in international financial markets. We examine whether subsidiary operations in offshore financial centers (OFCs) facilitate bank risk-taking. We construct an international sample of banks with and without OFC operations during 2001−2018 and employ various proxies for bank risk-taking. Our results reveal that banks with OFC operations take more risk than banks without OFC operations. Focusing on banks with OFC operations, we find that those with more intensive operations in OFCs exhibit higher risk. Our results also indicate that more intensive operations in OFCs with more regulatory arbitrage opportunities are associated with higher bank risk, and that restrictive bank capital regulations in home countries foster banks’ risk-taking via OFC operations. Our findings are consistent with the view that onshore banks exploit OFCs’ loose regulations, poor transparency, and lack of oversight to pursue riskier activities. These findings have important implications for the international business literature and provide regulators around the world with useful insights into overseeing bank operations in OFCs.

Keywords: Bank risk; Offshore financial center; Regulatory arbitrage; Comparative capitalism; Multiple regression analysis

JEL Classification: F30, G21, G23, K20