Is foreign-bank efficiency in financial centers driven by home-country characteristics?

This paper investigates the effects of home country banking regulations on the performance of foreign banks in Luxembourg’s financial center. We control for the main regulatory indicators, such as capital requirements, private monitoring, official disciplinary power and restrictions on bank activities, accounting for the regulatory regime applied to foreign banks. We also control for the level of GDP in the home country and its position in the business cycle. The two-stage bootstrap method proposed by Simar and Wilson (2007) is applied to bank panel data covering 1999-2009. The analysis carries policy implications for bank regulators in both home and host countries and provides insight into the choice between establishing a branch or a subsidiary, when developing cross-border activities through financial centers.