Regulatory Arbitrage and Cross-border Bank Acquisitions

We study how differences in bank regulation influence cross-border bank acquisition flows and the share price reactions to cross-border deal announcements. Using a sample of 7,297 domestic and 916 majority cross-border deals announced between 1995 and 2012, we find evidence of a form of “regulatory arbitrage” in which cross-border bank acquisition flows involve primarily acquirers from countries with stronger supervision, stricter capital requirements, more restrictions on bank activities, and stronger private monitoring than those of their targets. Target and aggregate abnormal returns around the deal announcements are positive and larger when acquirers come from countries with more restrictive bank regulatory environments. We uncover positive contagion effects of deal announcements to the acquirer and target peer banks in terms of their own share price reactions when acquirers come from countries with stronger regulations. There is no evidence that acquirer or target peer banks’ contributions to systemic risk increase around these acquisitions. We interpret these flows and deal-specific market reactions as consistent with a more benign form of “regulatory arbitrage” than a potentially destructive form.

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