Hub-and-Spoke Regulation and Bank Leverage

• In Event: Bank Regulation

Abstract

Hub-and-spoke regulation, where a central regulator with legal power over firms delegates
monitoring to local supervisors, can improve information collection, but can also lead to agency problems and capture. We document that following the closure of a US bank regulator’s field offices, the banks they previously supervised distribute cash, increase leverage, and increase their risk of failure, more than similar banks at the same time and place. The opposite occurs for openings. Our findings suggest that field level interaction is an important part of regulation, and that distancing supervisors from banks to prevent regulatory capture can increase bank risk.

Authors

• Yadav Krishna Gopalan, Washington University

• Ankit Kalda, Washington University in St. Louis

• Asaf Manela, Washington University in St. Louis