Why Do Banks Have So Much Debt In Tax Havens?

Tax havens represent the largest financing hub for financial institutions. For banks, they account for more than 20% of all cross-borders banking debt worldwide. Yet, our understanding of the underlying drivers remains limited. Drawing on a unique global dataset covering major international banks and tax havens – and employing a novel approach to isolate regulatory arbitrage – this paper finds that the location of cross-border intra-group debt held by multinational banks is shaped by tax considerations, even when regulatory differences are taken into account. For the first time, we provide direct evidence of profit shifting via debt shifting on a global scale, overcoming a key limitation of existing studies which typically rely on single-country data. Based on our sample data, we show that the magnitude of “excess” offshore banking debt globally recorded in tax havens is significant.