Hub-and-Spoke Regulation and Bank Leverage

51 Pages Posted: 16 Oct 2016 Last revised: 16 Jul 2017

Yadav Gopalan

Washington University in Saint Louis, John M. Olin Business School

Ankit Kalda

Washington University in Saint Louis, John M. Olin Business School

Asaf Manela

Washington University in St. Louis - John M. Olin Business School

Date Written: July 15, 2017

Abstract

Hub-and-spoke regulation, where a central regulator with legal power over firms delegates monitoring to local supervisors, can improve information collection, but can also lead to agency problems and capture. We document that following the closure of a US bank regulator’s field offices, the banks they previously supervised distribute cash, increase leverage, and increase their risk of failure, more than similar banks in the same time and place. The opposite occurs for openings. Our findings suggest that field level interaction is an important part of regulation, and that distancing supervisors from banks to prevent regulatory capture can increase bank risk.

Keywords: hub-and-spoke, financial regulation, bank supervision, field offices, distance, proximity, regulatory capture

JEL Classification: G21, G28, L51

Suggested Citation

Gopalan, Yadav and Kalda, Ankit and Manela, Asaf, Hub-and-Spoke Regulation and Bank Leverage (July 15, 2017). Available at SSRN: https://ssrn.com/abstract=2849877

Yadav Gopalan

Washington University in Saint Louis, John M. Olin Business School ( email )

St. Louis, MO
United States

Ankit Kalda

Washington University in Saint Louis, John M. Olin Business School ( email )

St. Louis, MO
United States

Asaf Manela (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-9178 (Phone)

HOME PAGE: http://apps.olin.wustl.edu/faculty/manela

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