Banking regulation and the changing geography of off-balance sheet activities

- Arbitrage due to the extraterritoriality of OTC swaps regulation is investigated.
- IRS exposure of branches of US banks shifted away from traditional locations.
- IRS exposure increased in countries where US banks can adopt local regulation.

This paper investigates whether the substitute compliance framework under the new US regime for over-the-counter derivatives has stimulated regulatory arbitrage. Results point to increased post-regulatory concentration in exposure in those countries in which US banks comply with local derivative regulation.