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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

Paper provided by Federal Reserve Bank of Chicago in its series Proceedings with number 906.

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Date of creation: 2002
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Publication status: Published in Conference on Bank Structure and Competition (2002 : 38th) ; Financial market behavior and appropriate regulation over the business cycle
Handle: RePEc:fip:fedhpr:906

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Keywords: Bank supervision;

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Cited by:
  1. Feng, Guohua & Zhang, Xiaohui, 2012. "Productivity and efficiency at large and community banks in the US: A Bayesian true random effects stochastic distance frontier analysis," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1883-1895.
  2. Rezende, Marcelo, 2014. "The Effects of Bank Charter Switching on Supervisory Ratings," Finance and Economics Discussion Series 2014-20, Board of Governors of the Federal Reserve System (U.S.).
  3. Yuliya Demyanyk & Elena Loutskina, 2012. "Mortgage companies and regulatory arbitrage," Working Paper 1220R, Federal Reserve Bank of Cleveland.
  4. Agur, Itai, 2013. "Multiple bank regulators and risk taking," Journal of Financial Stability, Elsevier, vol. 9(3), pages 259-268.
  5. Martin Cihák & Jörg Decressin, 2007. "The Case for a European Banking Charter," IMF Working Papers 07/173, International Monetary Fund.
  6. Itai Agur, 2009. "Regulatory Competition and Bank Risk Taking," DNB Working Papers 213, Netherlands Central Bank, Research Department.
  7. Itai Agur & Sunil Sharma, 2013. "Rules, Discretion, and Macro-Prudential Policy," IMF Working Papers 13/65, International Monetary Fund.
  8. 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.
  9. 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.
  10. International Monetary Fund, 2006. "Regulatory Capture in Banking," IMF Working Papers 06/34, International Monetary Fund.

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