Uneven Regulatory Playing Field and Bank Transparency Abroad

We study the implications of cross-country regulatory differences on banks’ transparency and stability abroad. Using a global sample of banks’ majority-owned foreign subsidiaries, we find that foreign subsidiaries’ transparency decreases when their home countries have tighter activity restrictions than their host countries. We also find that less transparent foreign subsidiaries are more likely to fail or experience large deposit withdrawals during the 2007-2009 financial crisis. Further analyses show that the effect of regulatory differences on foreign subsidiaries’ transparency is primarily driven by host countries with weak supervisory power. We also bolster the causal inference in a difference-in-differences design by taking advantage of cross-border acquisitions. We find that target banks’ transparency decreases after the acquisitions when the acquirer banks are from countries with more restrictive regulations than the targets. Overall, our study contributes to the literature by documenting the impact of regulatory inconsistency on foreign subsidiaries’ transparency and the economic consequences of the diminished transparency