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Regulatory Arbitrage and International Bank Flows

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  • Joel F. Houston

    (University of Florida)

  • Chen Lin

    (The Chinese University of Hong Kong and Hong Kong Institute for Monetary Research)

  • Yue Ma

    (Lingnan University and Hong Kong Institute for Monetary Research)

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, that without a strong institutional environment, lax regulations are not enough to encourage massive capital flows.

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Bibliographic Info

Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 152012.

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Length: 56 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:hkm:wpaper:152012

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Cited by:
  1. Buck, Florian & Schliephake, Eva, 2013. "The regulator’s trade-off: Bank supervision vs. minimum capital," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(11), pages 4584-4598.
  2. Can Bertay, A. & Demirgüc-Kunt, A. & Huizinga, H.P., 2011. "Is the Financial Safety Net a Barrier to Cross-Border Banking?," Discussion Paper, Tilburg University, Center for Economic Research 2011-132, Tilburg University, Center for Economic Research.
  3. Müller, Oliver & Uhde, André, 2013. "Cross-border bank lending: Empirical evidence on new determinants from OECD banking markets," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 23(C), pages 136-162.
  4. Buck, Florian & Schliephake, Eva, 2012. "Political Economy of Banking Regulation," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62018, Verein für Socialpolitik / German Economic Association.
  5. Pathan, Shams & Faff, Robert, 2013. "Does board structure in banks really affect their performance?," Journal of Banking & Finance, Elsevier, Elsevier, vol. 37(5), pages 1573-1589.
  6. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2014. "Institutional development and bank stability: Evidence from transition countries," Journal of Banking & Finance, Elsevier, Elsevier, vol. 39(C), pages 160-176.
  7. Florian Buck & Eva Schliephake, 2012. "The Regulator's Trade-off: Bank Supervision vs. Minimum Capital," CESifo Working Paper Series 3923, CESifo Group Munich.

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