Regulatory Arbitrage and Cross-Border Syndicated Loans

Asli Demirgüç-Kunt,Harry Huizinga,Bálint L Horváth

doi:10.2139/ssrn.3466742

Abstract

This paper investigates how international regulatory and institutional differences affect lending in the cross-border syndicated loan market. Lending provided through a foreign subsidiary is subject to subsidiary-country regulation and institutional arrangements. Multinational banks’ choices between loan origination through the parent bank or through a foreign subsidiary provide information about these banks’ preferences to operate in countries with varying regulations and institutions. Our results indicate that international banks have a tendency to switch loan origination towards countries with less stringent bank regulation and supervision consistent with regulatory arbitrage, but that they prefer to originate loans in countries with higher-quality institutions related to financial market monitoring, creditor rights, and the speed of contract enforcement.

Highlights

Banks have become increasingly international through the ownership of foreign subsidiary networks and the provision of cross-border loans
The foreign subsidiary share of loans at the borrower country level is negatively related to borrower country capital regulation stringency consistent with regulatory arbitrage, while it is positively related to the strength of creditor rights and the speed of contract enforcement in borrower countries, reflecting a role for institutional quality to affect the location of loan origination
The syndicated loan data enable us to see whether a multinational bank provides a cross-border loan directly from the parent bank or indirectly through a foreign subsidiary

Summary

Introduction

Banks have become increasingly international through the ownership of foreign subsidiary networks and the provision of cross-border loans. The foreign subsidiary share of loans at the borrower country level is negatively related to borrower country capital regulation stringency consistent with regulatory arbitrage, while it is positively related to the strength of creditor rights and the speed of contract enforcement in borrower countries, reflecting a role for institutional quality to affect the location of loan origination. 3. Regulatory arbitrage and loan volumes we consider how bank regulation and other institutional variables affect cross-border syndicated loan flows in the aggregate and the shares of loans originated in subsidiary countries. Regression 4 provides evidence that foreign subsidiary usage is positively related to the quality of institutions in borrower countries as related to financial market monitoring, creditor rights, and the time to enforce contracts, while foreign subsidiary usage is negatively related to borrower country supervisory, power consistent with regulatory arbitrage. The IV regressions 7-9 appear to be correctly specified

Bilateral loan flows between borrower and lender countries

Findings

Conclusions