Too Far To Regulate?

Abstract

I show causal evidence that regulators are averse to traveling long distances to supervise distant banks, indicating regulator moral hazard. Further, by exploiting exogenous distance-based variation in the scope and frequency of regulatory oversight, I show that regulatory oversight increases bank value. Distant banks benefit less from regulatory oversight as regulators are averse to traveling long distances. However, I find that this aversion can be mitigated by compensating regulators adequately, for instance through higher per diem rates. Overall, my results capture a previously overlooked aspect, namely, regulator moral hazard due to distance-based frictions. In contrast, distance-based frictions such as the inability to monitor or collect soft information over long distances would suggest a lower quality of regulatory oversight despite the regulator's best efforts to oversee distant banks.

Keywords: Supervision, Oversight, Regulators, Distance, Banks, Moral Hazard

JEL Classification: G20, G21, G28, G30