Review of Finance Vol. 29 No. 2 2025

Supervisory cooperation and regulatory arbitrage

Thorsten Beck¹; Consuelo Silva-Buston²; Wolf Wagner³

¹ Florence School of Banking and Finance, European University Institute , Florence, Italy, and CEPR · ² School of Management, Pontificia Universidad Católica de Chile and the CGCUC , Santiago, · ³ Rotterdam School of Management, Erasmus University , Rotterdam, Netherlands, and CEPR

Abstract

While bank supervisors frequently cooperate across countries, novel data on 268 cooperation agreements reveal that such cooperation falls short of covering the global operations of large banking groups. We show that this causes material regulatory arbitrage: banking groups allocate lending activities and risk into third-country subsidiaries when cooperation agreements cover their operations in other countries. The average distortion in a country’s foreign lending caused by regulatory arbitrage is 21 percent, with the effect being magnified in the presence of a weak supervisory framework. Taken together, our results indicate that incompleteness in cooperation substantially diminishes its global effectiveness.

DOI

10.1093/rof/rfae041

Volume

29

Issue

2

Pages

381-413

Language

en

Sources

bibtex:phds-export.bib openalex crossref

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