Inconsistent Regulators: Evidence from Banking

60 Pages Posted: 6 Jan 2012

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York

Amit Seru

Stanford University

Francesco Trebbi

Vancouver School of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 2012

Abstract

US state chartered commercial banks are supervised alternately by state and federal regulators. Each regulator supervises a given bank for a fixed time period according to a predetermined rotation schedule. We use unique data to examine differences between federal and state regulators for these banks. Federal regulators are significantly less lenient, downgrading supervisory ratings about twice as frequently as state supervisors. Under federal regulators, banks report higher nonperforming loans, more delinquent loans, higher regulatory capital ratios, and lower ROA. There is a higher frequency of bank failures and problem-bank rates in states with more lenient supervision relative to the federal benchmark. Some states are more lenient than others. Regulatory capture by industry constituents and supervisory staff characteristics can explain some of these differences. These findings suggest that inconsistent oversight can hamper the effectiveness of regulation by delaying corrective actions and by inducing costly variability in operations of regulated entities.

Suggested Citation

Agarwal, Sumit and Lucca, David O. and Seru, Amit and Trebbi, Francesco, Inconsistent Regulators: Evidence from Banking (January 2012). NBER Working Paper No. w17736. Available at SSRN: https://ssrn.com/abstract=1980585

Sumit Agarwal (Contact Author)

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
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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

Stanford University ( email )

Stanford, CA 94305
United States

Francesco Trebbi

Vancouver School of Economics ( email )

University of British Columbia
6000 Iona Dr.
Vancouver Canada, BC V6T 1L4
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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