Abstract

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Inconsistent Regulators: Evidence from Banking


Sumit Agarwal


National University of Singapore

David O. Lucca


Federal Reserve Banks - Federal Reserve Bank of New York

Amit Seru


University of Chicago - Booth School of Business and NBER

Francesco Trebbi


University of British Columbia (UBC) - Department of Economics; National Bureau of Economic Research (NBER)

April 1, 2013

AFA 2013 San Diego Meetings Paper

Abstract:     
We find that regulators can implement identical rules inconsistently due to differences in their institutional design and incentives and this behavior adversely impacts the effectiveness with which regulation is implemented. We study supervisory decisions of U.S. banking regulators and exploit a legally determined rotation policy that assigns federal and state supervisors to the same bank at exogenously fixed time intervals. Comparing federal and state regulator supervisory ratings within the same bank, we find that federal regulators are systematically tougher, downgrading supervisory ratings almost twice as frequently as state supervisors. State regulators counteract these downgrades to some degree by upgrading more frequently. Under federal regulators, banks report higher fraction of nonperforming loans, more delinquent loans, higher regulatory capital ratios, and lower returns on assets. Leniency of state regulators relative to their federal counterparts is related to costly consequences and likely proxies for delayed corrective actions—more lenient states have higher bank-failure rates, lower repayment rates of government assistance funds, and more costly bank resolutions. Moreover, relative leniency of state regulators at the bank level predicts the bank's subsequent likelihood of severe distress. The discrepancy in regulator behavior arises because of differences in how much regulators care about the local economy as well as differences in human and financial resources involved in implementing the regulation. There is no support for the corruption hypothesis, which includes “revolving doors” as a reason for leniency of state regulators. We conclude by discussing broader applicability of our findings as well as implications of our work for the design of banking regulators in the U.S. and Europe.

Number of Pages in PDF File: 59

Keywords: Banking Regulation, Banking Supervision, Dual Banking, CAMELS, Financial Institutions, European Banking

JEL Classification: G21, G28

working papers series


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Date posted: January 3, 2012 ; Last revised: April 10, 2013

Suggested Citation

Agarwal, Sumit and Lucca, David O. and Seru, Amit and Trebbi, Francesco, Inconsistent Regulators: Evidence from Banking (April 1, 2013). AFA 2013 San Diego Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1978548 or http://dx.doi.org/10.2139/ssrn.1978548

Contact Information

Sumit Agarwal (Contact Author)
National University of Singapore ( email )
15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)
HOME PAGE: http://www.ushakrisna.com
David O. Lucca
Federal Reserve Banks - Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
Amit Seru
University of Chicago - Booth School of Business and NBER ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Chicago Booth School of Business Logo

Francesco Trebbi
University of British Columbia (UBC) - Department of Economics ( email )
997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada
HOME PAGE: http://faculty.arts.ubc.ca/ftrebbi/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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