The Role of Regulatory Arbitrage in U.S. Banks' International Flows : Bank-Level Evidence

I study the prevalence and profitability of regulatory arbitrage in U.S. banks foreign activities. I analyze a publicly available bank-level dataset on bilateral lending flows to 75 countries over 2003-2013. U.S. banks lend less to borrowers in host countries with stricter bank regulations, and are less likely to maintain affiliates in such countries. Banks substitute from (host-regulated) affiliate toward (U.S.-regulated) cross-border lending in hosts with strict bank capital rules. This is particularly so for low-capitalized banks with lower foreign ownership shares. Banks that reduce their exposure to stricter host capital rules are more profitable in foreign activities