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"Cooperation externalities": Supranational supervision and regulatory arbitrage

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Listed:
  • Beck, Thorsten
  • Silva-Buston, Consuelo
  • Wagner, Wolf

Abstract

Banking supervisors frequently cooperate across countries, but cooperation only imperfectly covers the global operations of large banking groups. We show that this causes significant third-country externalities. Using hand-collected supervisory cooperation data, we document that banking groups shift lending activities and risk into third-country subsidiaries when cooperation agreements cover their operations in other countries. The implied country-level increase in the share of foreign loans is 16%. We also show that countries do not internalize third-country effects when making cooperation decisions, resulting in a 26 percentage point higher propensity to cooperate. Overall, our results highlight a need for "cooperating on cooperation."

Suggested Citation

  • Beck, Thorsten & Silva-Buston, Consuelo & Wagner, Wolf, 2022. ""Cooperation externalities": Supranational supervision and regulatory arbitrage," CEPR Discussion Papers 16978, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16978
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    More about this item

    Keywords

    Supranational cooperation; Cross-border banking; Externalities;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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