Do Regulators Search for the Quiet Life? The Relationship Between Regulators and the Regulated in Banking
34 Pages Posted: 23 Jan 2001
Date Written: June 2001
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 possible issue with regulation. Regulators may take 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. I would like to thank Susan Monaco, Terry Nixon, Greg Udell, and participants in workshops at Indiana University and the Federal Reserve Bank of Chicago for comments on the paper. Some of this work was completed while the author was visiting the Federal Reserve Bank of Chicago. The opinions expressed in this paper are those of the author, and do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.
Note: Previously titled: Do Regulators Race for the Bottom or for the Quiet Life? The Relationship Between Regulators and the Regulated in Banking
JEL Classification: G21, G38, K20, L50, G18
Suggested Citation: Suggested Citation