Is the fox guarding the henhouse? Bankers in the Federal Reserve, bank leverage and risk-shifting

Abstract

Nearly 30% of US banks employ at least one board member who currently serves (or has previously served) the Federal Reserve in a public service role. Public service roles take the form of Federal Reserve directorships or memberships in Federal Reserve advisory councils. We show that connections between banks and the Federal Reserve are linked to decreases in the sensitivity of bank leverage to risk. Further, connected banks extract larger public subsidies by shifting risk to the financial safety-net. Jointly, our results suggest that interactions between banks and regulators reduce supervisory effectiveness.

Reverse Revolving Doors in the Supervision of European Banks

“…Adams (2017) and Black and Dlugosz (2018) find that the appointment of a connected director benefits banks through supervisory forbearance and information advantage. Lim, Hagendorff, and Armitage (2019) find that, ceteris paribus, connected banks are less capitalized than non-connected ones, in line with a regulatory capture story. We add to the literature by documenting the existence of the reverse revolving door in EU national supervisors and by studying its valuation impact on supervised banks.…”

The Reverse Revolving Door in the Supervision of European Banks

“…Adams (2017) and Black and Dlugosz (2018) find that the appointment of a connected director benefits banks through supervisory forbearance and information advantage. In line with regulatory capture, Lim, Hagendorff, and Armitage (2019) find that connected banks are less capitalized than non-connected ones. We add to this literature on an institutionally recognized reverse revolving door by documenting the existence of a similar, informal phenomenon in EU national supervisors and by studying its impact on supervised banks.…”

Do bank bailouts have an impact on the underwriting business?

“…We consider three instruments that have been employed in prior papers dealing with endogeneity concerns in bank bailouts. Some earlier studies (Blau, Brough, & Thomas, 2013;Dam & Koetter, 2012;Li, 2013;Lim, Hagendorff, & Armitage, 2019) Econometrically, because the potentially endogenous explanatory variable is binary, we employ a dummy endogenous variable model (Wooldridge, 2002). For the first stage, we use a probit model that regresses a discrete dummy for recapitalized banks on the instruments and all control variables of our baseline regression model.…”