Supranational Cooperation and Regulatory Arbitrage

39 Pages Posted: 4 Feb 2022

See all articles by Thorsten Beck

Thorsten Beck

Florence School of Banking and Finance

Consuelo Silva Buston

Pontifical Catholic University of Chile - School of Business

Wolf Wagner

Erasmus University Rotterdam (EUR)

Date Written: January 1, 2022

Abstract

Using data on 113 banking groups, spanning 116 host and 40 home countries, we find that crossborder banks increase lending in a foreign subsidiary when the degree to which their other (foreign) subsidiaries are covered by supervisory cooperation agreements increases. This increase is funded by debt and does not improve profitability, suggesting higher risk-taking. The increase is stronger when supervisory oversight and market discipline in the subsidiary country are weak. Our results are confirmed by syndicated loan data and suggest that supervisory cooperation agreements have negative externalities on third countries, undermining overall effectiveness, and a need to "cooperate on cooperation".

Keywords: cross-border banking, Externalities, supranational cooperation

JEL Classification: G1, G2

Suggested Citation

Beck, Thorsten and Silva Buston, Consuelo and Wagner, Wolf, Supranational Cooperation and Regulatory Arbitrage (January 1, 2022). CEPR Discussion Paper No. DP16978, Available at SSRN: https://ssrn.com/abstract=4026884

Thorsten Beck (Contact Author)

Florence School of Banking and Finance ( email )

Florence
Italy

Consuelo Silva Buston

Pontifical Catholic University of Chile - School of Business ( email )

Vicuna Mackenna 4860
Santiago
Chile

Wolf Wagner

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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