Is three a crowd? competition among regulators in banking
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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|Date of creation:||2002|
|Date of revision:|
|Publication status:||Published in Conference on Bank Structure and Competition (2002 : 38th) ; Financial market behavior and appropriate regulation over the business cycle|
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