Authors: Nicola Cetorelli and Shohini Kundu
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Staff Reports
Regulatory Arbitrage Within the Firm
Number 1196
May 2026 Revised August 2026
May 2026 Revised August 2026
JEL classification: G21, G23, G28, G38
Regulation often applies asymmetrically across the legally distinct entities within a firm. We study the consequences in U.S. bank holding companies, where regulated banks coexist with more lightly-regulated nonbanks. Exploiting Basel III and predetermined variation in organizational complexity, we show firms meet tighter bank capital requirements by reallocating equity from nonbank subsidiaries rather than raising new capital, leaving consolidated capital unchanged. Banks become better capitalized and safer, while nonbanks become more thinly capitalized, shift toward riskier lending, and grow more fragile. Stress tests show organizational contagion erodes these gains in bank safety and can reverse them for the most exposed institutions.
Author Disclosure Statement(s)
Nicola Cetorelli
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Shohini Kundu
I have no relevant or material financial interests that relate to the research described in the paper, Regulatory Arbitrage within the Firm. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Shohini Kundu
I have no relevant or material financial interests that relate to the research described in the paper, Regulatory Arbitrage within the Firm. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Suggested Citation:
Cetorelli, Nicola, and Shohini Kundu. 2026. “Regulatory Arbitrage Within the Firm.” Federal Reserve Bank of New York Staff Reports, no. 1196, revised August 2026. https://doi.org/10.59576/sr.1196
Cetorelli, Nicola, and Shohini Kundu. 2026. “Regulatory Arbitrage Within the Firm.” Federal Reserve Bank of New York Staff Reports, no. 1196, revised August 2026. https://doi.org/10.59576/sr.1196
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