Regulatory liability of foreignness: enforcement against foreign banks in the United States

Abstract

Host country institutions lead to the liability of foreignness. However, few studies have empirically examined an institutional source of this liability - industrial regulation. Filling this gap, we explore the regulatory liability of foreignness in the U.S. banking industry and find that foreign subsidiaries are more likely to face regulatory enforcement actions than domestic banks. However, when we distinguish between bank risk-related regulations and local stakeholder-related regulations, only the latter impose extra burdens on subsidiaries. Moreover, greater parent bank human capital and host country experience help its subsidiaries comply more effectively with local regulations. By contrast, the international experience of a parent bank intensifies regulatory liabilities of its subsidiary, particularly in compliance with local stakeholder-related regulations.