Evidence of Regulatory Arbitrage in Cross-Border Mergers of Banks in the EU
Banks are in the business of taking calculated risks. Expanding the geographic footprint of an organization's profit-making activities changes the geographic pattern of its exposure to loss in ways that are hard for regulators and supervisors to observe. This paper tests and confirms the hypothesis that differences in the character of safety-net benefits that are available to banks in individual EU countries help to explain the nature of cross-border merger activity. If they wish to protect taxpayers from potentially destabilizing regulatory arbitrage, central bankers need to develop statistical procedures for assessing supervisory strength and weakness in partner countries. We believe that the methods and models used here can help in this task.
The authors thank Larry Wall for helpful comments and the Fundación de las Cajas de Ahorros (Funcas) for supporting this research. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.