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Is three a crowd? competition among regulators in banking

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  • Richard J. Rosen

Abstract

In some industries, firms are able to choose who regulates them. There is a long debate over whether regulatory competition is beneficial or whether it leads to a “race for the bottom.” We introduce another aspect to this discussion. Regulators may desire a “quiet life”, taking actions intended to minimize the effort they spend on work. Using banking as an example, we test this “quiet life” hypothesis against other explanations of regulatory behavior. Banks are able to switch among three options for a primary federal regulator: the OCC, the Federal Reserve, and the FDIC. We examine why they switch and what the results of switches are. We find support for the hypothesis that competition among regulators has beneficial aspects. Regulators seem to specialize, offering banks that are changing strategy the ability to improve performance by switching regulators. There is also evidence that the ability to switch regulators allows banks to get away from an examiner that desires a quiet life.

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Bibliographic Info

Article provided by Federal Reserve Bank of Chicago in its journal Proceedings.

Volume (Year): (2002)
Issue (Month): May ()
Pages:

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Handle: RePEc:fip:fedhpr:y:2002:i:may:x:2

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Related research

Keywords: Bank supervision;

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References

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  1. Alexander, John C. & Spivey, Michael F. & Wayne Marr, M., 1997. "Nonshareholder constituency statutes and shareholder wealth: A note," Journal of Banking & Finance, Elsevier, vol. 21(3), pages 417-432, March.
  2. Allen N. Berger & Timothy H. Hannan, 1998. "The Efficiency Cost Of Market Power In The Banking Industry: A Test Of The "Quiet Life" And Related Hypotheses," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 454-465, August.
  3. Allen N. Berger & Margaret K. Kyle & Joseph M. Scalise, 2000. "Did U.S. bank supervisors get tougher during the credit crunch? Did they get easier during the banking boom? Did it matter to bank lending?," Finance and Economics Discussion Series 2000-39, Board of Governors of the Federal Reserve System (U.S.).
  4. Roberta Romano, 1998. "Empowering Investors: A Market Approach to Securities Regulation," Yale School of Management Working Papers ysm74, Yale School of Management.
  5. Allen N. Berger & Gregory F. Udell, 1994. "Did risk-based capital allocate bank credit and cause a "credit crunch" in the United States?," Proceedings, Federal Reserve Bank of Cleveland, pages 585-633.
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Cited by:
  1. Agur, Itai, 2009. "Regulatory Competition and Bank Risk Taking," CEPR Discussion Papers 7524, C.E.P.R. Discussion Papers.
  2. Richard J. Rosen, 2005. "Switching primary federal regulators: is it beneficial for U.S. banks?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q III, pages 16-23.
  3. Adams, Renee B. & Santos, Joao A.C., 2006. "Identifying the effect of managerial control on firm performance," Journal of Accounting and Economics, Elsevier, vol. 41(1-2), pages 55-85, April.
  4. International Monetary Fund, 2006. "Regulatory Capture in Banking," IMF Working Papers 06/34, International Monetary Fund.
  5. Martin Cihák & Jörg Decressin, 2007. "The Case for a European Banking Charter," IMF Working Papers 07/173, International Monetary Fund.

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