Regulatory Arbitrage and Loan Location Decisions by Multinational Banks

Abstract

This paper examines the impact of international differences in capital regulation on multinational banks’ loan origination location decisions. International loan location decisions represent a key banking margin that has previously not been examined in the literature on regulatory arbitrage by banks. Our estimation relies on within-loan variation in location options, which enables us to fully control for borrower, bank as well as loan characteristics. We examine how loan location choices and the intensity of regulatory arbitrage are affected by borrower transparency (to the bank) and bank transparency (to bank supervisors). We find that greater borrower transparency to a local bank establishment makes loan location more likely, while greater bank transparency has the opposite effect. Furthermore, regulatory arbitrage is more intense in the case of more transparent borrowers.

Keywords: Regulatory arbitrage, capital regulations, loan origination