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Offshore financial centers: parasites or symbionts?

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  • Andrew K. Rose
  • Mark M. Spiegel

Abstract

This paper analyzes the causes and consequences of offshore financial centers (OFCs). Since OFCs are likely to be tax havens and money launderers, they encourage bad behavior in source countries. Nevertheless, OFCs may also have unintended positive consequences for their neighbors, since they act as a competitive fringe for the domestic banking sector. We derive and simulate a model of a home country monopoly bank facing a representative competitive OFC which offers tax advantages attained by moving assets offshore at a cost that is increasing in distance between the OFC and the source. Our model predicts that proximity to an OFC is likely to have pro-competitive implications for the domestic banking sector, although the overall effect on welfare is ambiguous. We test and confirm the predictions empirically. Proximity to an OFC is associated with a more competitive domestic banking system and greater overall financial depth.

Suggested Citation

  • Andrew K. Rose & Mark M. Spiegel, 2005. "Offshore financial centers: parasites or symbionts?," Working Paper Series 2005-05, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2005-05
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    More about this item

    Keywords

    Banks and banking; International; Competition; Bank supervision;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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