IDEAS home Printed from https://ideas.repec.org/p/chf/rpseri/rp2002.html
   My bibliography  Save this paper

Unintended Consequences of the Global Derivatives Market Reform

Author

Listed:
  • Pauline Gandré

    (Ecole Normale Supérieure (ENS) de Lyon; University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE))

  • Mike Mariathasan

    (KU Leuven- Faculty of Economics & Business)

  • Ouarda Merrouche

    (University of Lausanne)

  • Steven Ongena

    (University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR))

Abstract

We investigate regulatory arbitrage during the G20’s global derivatives market reform. Using hand-collected data on staggered reform progress, we find that banks shift their trading towards less regulated jurisdictions. The result is driven by agenda items – such as the promotion of central clearing – that are costly, but do not directly benefit banks. We further document that subsidiaries in jurisdictions with more reform progress shift to riskier portfolios. Alleviating endogeneity concerns we show that reform progress is primarily driven by structural (time-invariant) factors.

Suggested Citation

  • Pauline Gandré & Mike Mariathasan & Ouarda Merrouche & Steven Ongena, 2020. "Unintended Consequences of the Global Derivatives Market Reform," Swiss Finance Institute Research Paper Series 20-02, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2002
    as

    Download full text from publisher

    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3518411
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ongena, Steven & Popov, Alexander & Udell, Gregory F., 2013. "“When the cat's away the mice will play”: Does regulation at home affect bank risk-taking abroad?," Journal of Financial Economics, Elsevier, vol. 108(3), pages 727-750.
    2. Temesvary, Judit, 2015. "Foreign activities of U.S. banks since 1997: The roles of regulations and market conditions in crises and normal times," Journal of International Money and Finance, Elsevier, vol. 56(C), pages 202-222.
    3. Alan D. Morrison & Lucy White, 2009. "Level Playing Fields in International Financial Regulation," Journal of Finance, American Finance Association, vol. 64(3), pages 1099-1142, June.
    4. Mariathasan, Mike & Merrouche, Ouarda, 2014. "The manipulation of basel risk-weights," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 300-321.
    5. Umar Faruqui & Wenqian Huang & Előd Takáts, 2018. "Clearing risks in OTC derivatives markets: the CCP-bank nexus," BIS Quarterly Review, Bank for International Settlements, December.
    6. Luc Laeven & Fabian Valencia, 2020. "Systemic Banking Crises Database II," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(2), pages 307-361, June.
    7. Benos, Evangelos & Payne, Richard & Vasios, Michalis, 2020. "Centralized Trading, Transparency, and Interest Rate Swap Market Liquidity: Evidence from the Implementation of the Dodd–Frank Act," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(1), pages 159-192, February.
    8. Laeven, Luc & Levine, Ross, 2009. "Bank governance, regulation and risk taking," Journal of Financial Economics, Elsevier, vol. 93(2), pages 259-275, August.
    9. Rene M. Stulz, 2010. "Credit Default Swaps and the Credit Crisis," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 73-92, Winter.
    10. Samim Ghamami & Paul Glasserman, 2016. "Does OTC Derivatives Reform Incentivize Central Clearing?," Working Papers 16-07, Office of Financial Research, US Department of the Treasury.
    11. G. Andrew Karolyi & Alvaro G. Taboada, 2015. "Regulatory Arbitrage and Cross‐Border Bank Acquisitions," Journal of Finance, American Finance Association, vol. 70(6), pages 2395-2450, December.
    12. Buch, Claudia M, 2003. "Information or Regulation: What Drives the International Activities of Commercial Banks?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 851-869, December.
    13. Joel F. Houston & Chen Lin & Yue Ma, 2012. "Regulatory Arbitrage and International Bank Flows," Journal of Finance, American Finance Association, vol. 67(5), pages 1845-1895, October.
    14. J.R. Barth & G. Caprio Jr. & R. Levine, 2015. "Misdiagnosis: Incomplete Cures of Financial Regulatory Failures," World Scientific Book Chapters, in: James R Barth & George G Kaufman (ed.), The First Great Financial Crisis of the 21st Century A Retrospective, chapter 15, pages 399-431, World Scientific Publishing Co. Pte. Ltd..
    15. James R Barth & George G Kaufman (ed.), 2015. "The First Great Financial Crisis of the 21st Century:A Retrospective," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number 9469, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frame, W. Scott & Mihov, Atanas & Sanz, Leandro, 2020. "Foreign Investment, Regulatory Arbitrage, and the Risk of U.S. Banking Organizations," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 55(3), pages 955-988, May.
    2. Boyer, Pierre C. & Kempf, Hubert, 2020. "Regulatory arbitrage and the efficiency of banking regulation," Journal of Financial Intermediation, Elsevier, vol. 41(C).
    3. Eichler, Stefan & Littke, Helge C.N. & Tonzer, Lena, 2017. "Central bank transparency and cross-border banking," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 1-30.
    4. Buck, Florian & Schliephake, Eva, 2013. "The regulator’s trade-off: Bank supervision vs. minimum capital," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4584-4598.
    5. Fang, Yiwei & Hasan, Iftekhar & Marton, Katherin, 2014. "Institutional development and bank stability: Evidence from transition countries," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 160-176.
    6. Annick Pamen Nyola & Alain Sauviat & Amine Tarazi, 2022. "How does regulation affect the organizational form of foreign banks' presence in developing versus developed countries?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2367-2419, April.
    7. Allen N. Berger & Sadok El Ghoul & Omrane Guedhami & Raluca A. Roman, 2017. "Internationalization and Bank Risk," Management Science, INFORMS, vol. 63(7), pages 2283-2301, July.
    8. Tai-Yuan Chen & Yi-Chun Chen & Mingyi Hung, 2022. "Uneven regulatory playing field and bank transparency abroad," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 53(3), pages 379-404, April.
    9. Gersbach, Hans & Haller, Hans & Papageorgiou, Stylianos, 2018. "Regulatory Competition in Banking: A General Equilibrium Approach," CEPR Discussion Papers 12791, C.E.P.R. Discussion Papers.
    10. G Andrew Karolyi & John Sedunov & Alvaro G. Taboada, 2023. "Cross-Border Bank Flows and Systemic Risk," Review of Finance, European Finance Association, vol. 27(5), pages 1563-1614.
    11. Judit Temesvary, 2018. "The Role Of Regulatory Arbitrage In U.S. Banks' International Flows: Bank‐Level Evidence," Economic Inquiry, Western Economic Association International, vol. 56(4), pages 2077-2098, October.
    12. Wenxia Ge & Jeong-Bon Kim & Tiemei Li & Jing Zhang, 2022. "Subsidiary operations in offshore financial centers and bank risk-taking: International evidence," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 53(2), pages 268-301, March.
    13. Laeven, Luc & Popov, Alexander, 2023. "Carbon taxes and the geography of fossil lending," Journal of International Economics, Elsevier, vol. 144(C).
    14. Iftekhar Hasan & Suk-Joong Kim & Eliza Wu, 2018. "The Effects of Ratings-Contingent Regulation on International Bank Lending Behavior: Evidence from the Basel 2 Accord," World Scientific Book Chapters, in: Information Spillovers and Market Integration in International Finance Empirical Analyses, chapter 16, pages 547-603, World Scientific Publishing Co. Pte. Ltd..
    15. Alpanda, Sami & Aysun, Uluc, 2022. "Regulatory arbitrage and economic stability," Journal of International Money and Finance, Elsevier, vol. 129(C).
    16. Uluc Aysun & Michael Tseng, 2021. "Regulatory arbitrage and global push factors," Working Papers 2021-01, University of Central Florida, Department of Economics.
    17. Horváth, Bálint L., 2020. "The interaction of bank regulation and taxation," Journal of Corporate Finance, Elsevier, vol. 64(C).
    18. Maier, Ulf, 2017. "Regulatory Competition In Capital Standards with Selection Effects among Banks," Rationality and Competition Discussion Paper Series 7, CRC TRR 190 Rationality and Competition.
    19. Demirguc-Kunt, Asli & Horvath, Balint L. & Huizinga, Harry, 2019. "Regulatory arbitrage and cross-border syndicated loans," Other publications TiSEM 3e62fc2c-fa54-4699-ba52-4, Tilburg University, School of Economics and Management.
    20. Martynova, Natalya & Vogel, Ursula, 2022. "Banks’ complexity-risk nexus and the role of regulation," Journal of Banking & Finance, Elsevier, vol. 134(C).

    More about this item

    Keywords

    Bank regulation; Regulatory arbitrage; OTC Markets; Derivatives; Cross-border financial institutions; Financial risk;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:chf:rpseri:rp2002. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ridima Mittal (email available below). General contact details of provider: https://edirc.repec.org/data/fameech.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.