Is the Fox Guarding the Henhouse? Bankers in the Federal Reserve, Bank Leverage and Risk-shifting

73 Pages Posted: 6 Oct 2015 Last revised: 7 May 2019

See all articles by Ivan Lim

Ivan Lim

Leeds University Business School

Jens Hagendorff

University of Edinburgh - Business School

Seth Armitage

University of Edinburgh - Accounting and Finance

Date Written: March 14, 2019

Abstract

Nearly 30% of US banks employ at least one board member who currently serves (or has previously served) the Federal Reserve in a public service role. Public service roles take the form of Federal Reserve directorships or memberships in Federal Reserve advisory councils. We show that connections between banks and the Federal Reserve are linked to decreases in the sensitivity of bank leverage to risk. Further, connected banks extract larger public subsidies by shifting risk to the financial safety-net. Jointly, our results suggest that interactions between banks and regulators reduce supervisory effectiveness.

Keywords: Federal Reserve, banks, regulatory connections, risk-shifting, public subsidies

JEL Classification: G21, G28, G32, D72

Suggested Citation

Lim, Ivan and Hagendorff, Jens and Armitage, Seth, Is the Fox Guarding the Henhouse? Bankers in the Federal Reserve, Bank Leverage and Risk-shifting (March 14, 2019). Available at SSRN: https://ssrn.com/abstract=2669431 or http://dx.doi.org/10.2139/ssrn.2669431

Ivan Lim (Contact Author)

Leeds University Business School ( email )

Maurice Keyworth Building
Moorland Road
Leeds, UK
United Kingdom

Jens Hagendorff

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Seth Armitage

University of Edinburgh - Accounting and Finance ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom
44 131 650 3794 (Phone)

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