Discussion paper
DP20051 Regulatory Arbitrage and Real Effects
We examine the effects of cross-border regulatory arbitrage on corporate lending and firm performance. We show that subsidiaries of banking groups improve loan conditions for firms when the group’s opportunities to take risks elsewhere are curbed. The expansion in lending is targeted towards firms of higher quality and firms that the group is already familiar with. The improved lending conditions have positive real effects, allowing recipient firms to increase capital spending and leading to higher profits. Taken together, our results suggest that there can be benefits for firms in countries that receive lending inflows due to the regulatory arbitrage.
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