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Regulatory Arbitrage Within the Firm
Regulation shapes the boundaries of firms. When prudential standards bind asymmetrically across subsidiaries of an integrated organization, internal capital markets become a mechanism for regulatory arbitrage. We study this in U.S. banking, where holding companies encompass both heavily regulated depository institutions and lightly regulated nonbank affiliates. Following Basel III in 2015, holding companies extract equity from nonbank subsidiaries to recapitalize their banks. Bank subsidiaries accumulate 5-8 percentage points more excess capital than comparable standalone banks through ...