I Just Cannot Get You Out of My Head: Regulatory Capture of Financial Sector Supervisors

39 Pages Posted: 5 Feb 2014

See all articles by Dennis Veltrop

Dennis Veltrop

De Nederlandsche Bank; University of Groningen

Jakob de Haan

De Nederlandsche Bank; University of Groningen

Date Written: January 27, 2014

Abstract

Regulatory capture is generally considered to be a principal cause for shortcomings in financial sector regulation and supervision. Little is known, however, about the mechanisms driving public officials’ capture by the financial industry. We argue that social identification with the financial sector is an important psychological mechanism driving regulatory capture of financial sector supervisors and that this is likely to reduce supervisory effectiveness. Using survey data gathered from supervisors working at two Dutch financial supervisory institutions, our results demonstrate that, first, supervisors with previous tenure in the financial sector are more likely to socially identify with the financial sector, second, that social identification with the financial sector negatively affects supervisors’ task performance, and, third, that the negative effect from socially identifying with the financial sector can be curbed by a supervisor’s professional identity. These results shed light on the, to date, unaddressed psychological mechanisms driving regulatory capture.

Suggested Citation

Veltrop, Dennis and de Haan, Jakob, I Just Cannot Get You Out of My Head: Regulatory Capture of Financial Sector Supervisors (January 27, 2014). De Nederlandsche Bank Working Paper No. 410. Available at SSRN: https://ssrn.com/abstract=2391123 or http://dx.doi.org/10.2139/ssrn.2391123

Dennis Veltrop (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

University of Groningen ( email )

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

Jakob de Haan

De Nederlandsche Bank

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

University of Groningen

P.O. Box 800
9700 AH Groningen, Groningen 9700 AV
Netherlands

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