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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.

Suggested Citation

  • Richard J. Rosen, 2002. "Is three a crowd? competition among regulators in banking," Proceedings 906, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhpr:906
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    Cited by:

    1. 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.).
    2. Sumit Agarwal & David Lucca & Amit Seru & Francesco Trebbi, 2014. "Inconsistent Regulators: Evidence from Banking," The Quarterly Journal of Economics, Oxford University Press, vol. 129(2), pages 889-938.
    3. 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.
    4. 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.
    5. Itai Agur & Sunil Sharma, 2013. "Rules, Discretion, and Macro-Prudential Policy," IMF Working Papers 13/65, International Monetary Fund.
    6. repec:kap:jproda:v:48:y:2017:i:2:d:10.1007_s11123-017-0515-5 is not listed on IDEAS
    7. Agur, Itai, 2009. "Regulatory Competition and Bank Risk Taking," CEPR Discussion Papers 7524, C.E.P.R. Discussion Papers.
    8. repec:kap:copoec:v:28:y:2017:i:3:d:10.1007_s10602-016-9223-9 is not listed on IDEAS
    9. Martin Cihak & Jörg Decressin, 2007. "The Case for a European Banking Charter," IMF Working Papers 07/173, International Monetary Fund.
    10. Agur, Itai, 2013. "Multiple bank regulators and risk taking," Journal of Financial Stability, Elsevier, vol. 9(3), pages 259-268.
    11. 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.
    12. Nilufer Ozdemir, 2016. "Implications of the Dual Banking System in the US," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 44(1), pages 91-103, March.
    13. Demyanyk, Yuliya & Loutskina, Elena, 2016. "Mortgage companies and regulatory arbitrage," Journal of Financial Economics, Elsevier, vol. 122(2), pages 328-351.
    14. International Monetary Fund, 2006. "Regulatory Capture in Banking," IMF Working Papers 06/34, International Monetary Fund.
    15. Hans Degryse & Sanja Jakovljević & Steven Ongena, 2015. "A Review of Empirical Research on the Design and Impact of Regulation in the Banking Sector," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 423-443, December.

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    Keywords

    Bank supervision;

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