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Foreign Investment, Regulatory Arbitrage, and the Risk of U.S. Banking Organizations

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  • Frame, W. Scott
  • Mihov, Atanas
  • Sanz, Leandro

Abstract

This study investigates the implications of cross-country differences in banking regulation and supervision for the international subsidiary locations and risk of U.S. bank holding companies (BHCs). We find that BHCs are more likely to operate subsidiaries in countries with weaker regulation and supervision and that such location decisions are associated with elevated BHC risk and higher contribution to systemic risk. The quality of BHCs’ internal controls and risk management plays an important role in these location choices and risk outcomes. Overall, our study suggests that U.S. banking organizations engage in cross-country regulatory arbitrage, with potentially adverse consequences.

Suggested Citation

  • Frame, W. Scott & Mihov, Atanas & Sanz, Leandro, 2020. "Foreign Investment, Regulatory Arbitrage, and the Risk of U.S. Banking Organizations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(3), pages 955-988, May.
    • Handle: RePEc:cup:jfinqa:v:55:y:2020:i:3:p:955-988_8
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    2. Berger, Allen N. & Curti, Filippo & Mihov, Atanas & Sedunov, John, 2022. "Operational Risk is More Systemic than You Think: Evidence from U.S. Bank Holding Companies," Journal of Banking & Finance, Elsevier, vol. 143(C).
    3. Fricke, Daniel & Greppmair, Stefan & Paludkiewicz, Karol, 2022. "You can't always get what you want (where you want it): Cross-border effects of the US money market fund reform," Discussion Papers 03/2022, Deutsche Bundesbank.
    4. McLemore, Ping & Mihov, Atanas & Sanz, Leandro, 2022. "Global banks and systemic risk: The dark side of country financial connectedness," Journal of International Money and Finance, Elsevier, vol. 129(C).
    5. Berger, Allen N. & El Ghoul, Sadok & Guedhami, Omrane & Roman, Raluca A., 2022. "Geographic deregulation and banks’ cost of equity capital," Journal of International Money and Finance, Elsevier, vol. 120(C).
    6. Mikko Makinen & Laura Solanko, 2018. "Determinants of Bank Closures: Do Levels or Changes of CAMEL Variables Matter?," Russian Journal of Money and Finance, Bank of Russia, vol. 77(2), pages 3-21, June.
    7. Paligorova, Teodora & Temesvary, Judit, 2022. "Foreign banks’ asset reallocation in response to the introduction of the intermediate holding company rule of 2016," Finance Research Letters, Elsevier, vol. 47(PB).
    8. Chen, Jiakai, 2022. "Market discipline and regulatory arbitrage: Evidence from ABCP liquidity guarantors," Journal of Banking & Finance, Elsevier, vol. 145(C).
    9. Lyu, Chaofeng & Xiao, Ziheng & Pu, Yun, 2023. "Financial openness and firm exports: Evidence from Foreign-owned Banks in China," International Review of Financial Analysis, Elsevier, vol. 87(C).
    10. Chronopoulos, Dimitris K. & Wilson, John O.S. & Yilmaz, Muhammed H., 2023. "Regulatory oversight and bank risk," Journal of Financial Stability, Elsevier, vol. 64(C).
    11. Clark, Brian & Ebrahim, Alireza, 2022. "Risk shifting and regulatory arbitrage: Evidence from operational risk," Journal of Financial Stability, Elsevier, vol. 58(C).
    12. Yildirim, Canan & Kasman, Adnan & Gulamhussen, Mohamed Azzim, 2023. "Efficiency of multinational banks: Impacts of geographic and product loci," International Business Review, Elsevier, vol. 32(5).
    13. Tai-Yuan Chen & Yi-Chun Chen & Mingyi Hung, 2022. "Uneven regulatory playing field and bank transparency abroad," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 53(3), pages 379-404, April.
    14. Ongena, Steven & Conlon, Thomas & Huan, Xing, 2020. "Operational Risk Capital," CEPR Discussion Papers 15096, C.E.P.R. Discussion Papers.
    15. Sedunov, John, 2021. "Federal reserve intervention and systemic risk during financial crises," Journal of Banking & Finance, Elsevier, vol. 133(C).

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    More about this item

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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