We find that heightened cross-border bank flows are associated with lower systemic risk in a target country’s banking system. The reductions in systemic risk are stronger for flows coming from source countries with stronger regulatory oversight than the target country. Such cross-border bank flows linked to regulatory arbitrage are also associated with improvements in target banking sector profitability, asset quality, and efficiency. We assess several alternative channels of influence for cross-border bank flows but interpret the evidence on these flows as mostly consistent with a benign form of regulatory arbitrage.

ABSTRACT We study how differences in bank regulation influence cross‐border bank acquisition flows and share price reactions to cross‐border deal announcements. Using a sample of 7,297 domestic and 916 majority cross‐border deals announced between 1995 and 2012, we find evidence of a form of “regulatory arbitrage” whereby acquisition flows involve acquirers from countries with stronger regulations than their targets. Target and aggregate abnormal returns around deal announcements are positive and larger when acquirers come from more restrictive bank regulatory environments. We interpret this evidence as more consistent with a benign form of regulatory arbitrage than a potentially destructive one.

We assess the effects of board gender quota laws using a sample of banks from 39 countries. We document an increase in both stand-alone and systemic risk post-quota among banks that did not meet the quota pre-reform; the effect is stronger for banks in countries with a smaller pool of women in finance and low gender equality. We find that the propagation of poor governance practices by overlapping female directors and deterioration in the information environment post quota are likely channels driving the results. The evidence is consistent with some banks “gaming” the reform by strategically appointing insiders, which weakens the board's monitoring function. Our results have policy implications and suggest that supply-side factors are key determinants of the outcome of mandated quotas.