Regulatory Arbitrage in Cross‐Border Banking Mergers within the EU

Expanding the cross‐country footprint of an organization's profit‐making activities changes the geographic pattern of its exposure to loss in ways that are hard for regulators and supervisors to observe. This paper tests and confirms the hypothesis that differences in the size and character of safety‐net benefits available to banks in individual EU countries help to account for cross‐border merger activity. Our results suggest that central bankers need to develop statistical procedures for assessing the consequences of differences in supervisory strength and weakness in partner countries. We believe that the methods used here can help in this task.