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  3. 2027
  4. Preliminary Program
  5. Global Banking, Regulatory Arbitrage and Capital Flows
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Global Banking, Regulatory Arbitrage and Capital Flows

Paper Session

Sunday, Jan. 3, 2027 8:00 AM - 10:00 AM (EST)

Westin DC Downtown
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Lars Norden, Getulio Vargas Foundation

Geoeconomic Competition and Capital Reallocation in Global FX Funding

Yu An
,
Johns Hopkins University
Amy Huber
,
University of Pennsylvania

Abstract

We study geo-economic competition and capital reallocation in global financial markets, using the foreign exchange (FX) funding market as our empirical setting. FX funding, obtained by borrowing one currency while pledging another through FX swaps, is instrumental to cross-border investment and provides high frequency measures of capital reallocation. Countries compete for FX funding through policy actions that shift investment returns or funding costs, thereby inducing global portfolio rebalancing by private investors. We quantify this competition by measuring how one country’s inflow responds to another country’s actions, which we call “reallocation exposure.” Because observed funding flows reflect common shocks and strategic interactions across countries, bilateral influence is difficult to identify. We resolve this challenge by identifying “funding fronts,” the independent margins of portfolio adjustment that enable systematic estimation of reallocation exposure. Applying our framework to a proprietary dataset, we find that FX funding competition is concentrated in a small number of funding fronts, with a dominant U.S. dollar front accounting for most capital reallocation. Consequently, changes in U.S. conditions generate disproportionately large reallocations elsewhere. We use reallocation exposure to construct time-varying measures of geo-economic power and show that variations systematically track major monetary, fiscal, and geopolitical events. Finally, we characterize the network of financial competition and cooperation and show that strategic responses implied by reallocation exposure align with cross-country movements in policy rates.

Regulatory Divergence and Bank Capital Flows

Lucas Cisneros
,
SBS
Bryan Gutierrez
,
University of Minnesota

Abstract

How does cross-country divergence in banking regulation shape domestic banking systems? We study whether stricter local capital requirements significantly rebalances the competitive landscape toward global banks regulated in foreign jurisdictions. Using novel Peruvian data that captures local lending by foreign regulated global banks, we show that this organizational form supplies nearly 25% of corporate dollar credit. Using both a reduced-form strategy and a structural approach, we find that higher local capital requirements substantially shift credit allocation: foreign regulated banks expand by 7-10pp relative to locally regulated lenders, even for the same borrower.

When Global Banks Leave: Market Concentration and Structural Regression in Developing Countries

G. Andrew Karolyi
,
Cornell Univerisity
Stephen Karolyi
,
George Mason University
Leili Pour Rostami
,
University of Massachusetts-Boston

Abstract

Post-crisis regulation has driven 166 international bank exits from developing countries since 2008. Using shift-share instruments that isolate the home-country regulatory component of these departures, we find that bank exits increase agriculture’s share of GDP by 3 to 4 percentage points in 2SLS, reversing decades of structural diversification. A cumulative specification implies approximately 0.9 percentage points per departing banking group. The mechanism runs through market concentration: in countries where banking was already concentrated, exits reduce domestic credit by 7 to 9 percentage points of GDP, widen lending-deposit spreads by 5–7 percentage points, and raise unemployment. In competitive markets, exits produce no such cascade.

Discussant(s)
Judit Temesvary
,
Federal Reserve Board
Camelia Minoiu
,
Federal Reserve Bank of Atlanta
Divya Khirti
,
International Monetary Fund
JEL Classifications
  • G2 - Financial Institutions and Services