Working Paper: CEPR ID: DP14802
Authors: Pauline Gandr; Mike Mariathasan; Ouarda Merrouche; Steven Ongena
Abstract: We investigate regulatory arbitrage during the G20’s global derivatives market reform. We hand-collect comprehensive data on the staggeredreform process and show that its progress is primarily driven by structural time-invariant factors. Following the reform banks shift up to 70 percent of their derivatives activity towards less regulated jurisdictions. This shift is driven by reform items – such as the promotion of central clearing – that are costly, but do not directly benefit them. Subsidiaries in jurisdictions with more regulatory progress shift into riskier portfolios.
Keywords: bank regulation; regulatory arbitrage; otc markets; derivatives; cross-border financial institutions; financial risk
JEL Codes: G15; G18; G21; G23; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory progress in various jurisdictions (G18) | Volume of derivatives activity held by US banks' foreign subsidiaries (G15) |
| Tighter regulations (G18) | Regulatory arbitrage (G18) |
| Regulatory arbitrage (G18) | Shift of derivatives activities towards less regulated jurisdictions (F29) |
| Regulatory progress in host country (L59) | Fraction of US banks' interest rate swap activities in that country (G21) |
| Regulatory pressures (G18) | Riskier trading portfolios in subsidiaries (G19) |
| Shift of derivatives activities towards less regulated jurisdictions (F29) | Increase in global financial risk (F65) |