Regulatory arbitrage and international bank flows

Joel F. HOUSTON, Chen LIN, Yue MA

Research output: Journal PublicationsJournal Article (refereed)

80 Citations (Scopus)

Abstract

We study whether cross-country differences in regulations have affected international bank flows. We find strong evidence that banks have transferred funds to markets with fewer regulations. This form of regulatory arbitrage suggests there may be a destructive "race to the bottom" in global regulations, which restricts domestic regulators' ability to limit bank risk-taking. However, we also find that the links between regulation differences and bank flows are significantly stronger if the recipient country is a developed country with strong property rights and creditor rights. This suggests that, while differences in regulations have important influences, without a strong institutional environment, lax regulations are not enough to encourage massive capital flows.
Original languageEnglish
Pages (from-to)1845-1895
Number of pages51
JournalJournal of Finance
Volume67
Issue number5
DOIs
Publication statusPublished - 1 Oct 2012

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