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.