Working Paper: NBER ID: w15447
Authors: Santiago Carbo-Valverde; Edward J. Kane; Francisco Rodriguez-Fernandez
Abstract: 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.
Keywords: regulatory arbitrage; cross-border mergers; safety-net benefits; EU banking regulation
JEL Codes: F3; G2; K2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Regulatory environment (G38) | shape outcomes of cross-border mergers (G34) |
| Poorly monitored risks (D81) | transferred to taxpayers in less regulated countries (H87) |
| Differences in safety-net benefits across EU countries (H55) | nature of cross-border merger activity (F23) |
| Higher safety-net subsidies (H53) | increased leverage and risk-taking post-merger (G34) |
| Access to safety-net benefits (I38) | mask off-balance-sheet activities or increase portfolio risk (G32) |
| Cross-border merging banks (CBMs) (F36) | higher safety-net subsidies (H53) |