Discussion paper

DP16978 "Cooperation externalities": Supranational supervision and regulatory arbitrage

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."

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Citation

Beck, T, C Silva-Buston and W Wagner (eds) (2022), “DP16978 "Cooperation externalities": Supranational supervision and regulatory arbitrage”, CEPR Press Discussion Paper No. 16978. https://new.cepr.org/publications/dp16978