Regulatory Arbitrage in Cross-Border Banking Mergers within the EU

Authors


  • The authors thank Philipp Hartmann, Larry Wall, audiences at the European Central Bank and Federal Reserve Bank of San Francisco, the editor, and two referees for helpful comments and the Fundación de las Cajas de Ahorros (Funcas) for supporting this research. Santiago Carbó and Francisco Rodriguez acknowledge financial support from the Spanish Ministry of Science and Innovation and FEDER (ECO2008-05243/ECON) and from the Consejería de Innovación, Ciencia y Empresa- Junta de Andalucía (P08-SEJ-03781).

Abstract

Expanding the cross-country 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 size and character of safety-net benefits available to banks in individual EU countries help to account for cross-border merger activity. Our results suggest that central bankers need to develop statistical procedures for assessing the consequences of differences in supervisory strength and weakness in partner countries. We believe that the methods used here can help in this task.

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