Using data on 364 subsidiaries belonging to 113 banking groups across 116 host countries and 40 home
countries from 1995 to 2013, we find that banking groups increase lending in a foreign subsidiary when the degree to which their other (foreign) subsidiaries are covered by cooperation agreements increases. The increase in lending is funded by debt and
does not lead to higher profitability, suggesting higher risk-taking in the subsidiary. We show that the magnitude of the lending effect is higher when supervisory oversight and market discipline in the subsidiary country are weak relative to the other countries
a bank group is operating in. We confirm our findings with syndicated loan data: loans are more likely to be given at third party subsidiaries if supervisory cooperation with parent bank and other host country supervisors increases, especially in the case
of risky loans and risky borrowers. Taken together, our results indicate that supervisory cooperation agreements have negative externalities on third countries, as banks shift risks, undermining their overall effectiveness and suggesting a need
to “cooperate on cooperation” across all parent and host country supervisors. And coming back to our previous paper, as regulatory arbitrage is easier done across larger banking groups with more subsidiaries across more host countries, this
can explain why (incomplete) supervisory cooperation does not necessarily lead to stability gains.