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Hub-and-Spoke Regulation and Bank Leverage
[Inconsistent regulators: evidence from banking]

Author

Listed:
  • Yadav Gopalan
  • Ankit Kalda
  • Asaf Manela

Abstract

Regulators often delegate monitoring to local supervisors, which 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 actively increased their risk of failure by distributing cash, increasing leverage, and lending more than similar banks at the same time and place. Supervisor proximity is a channel through which these effects operate. Our findings suggest that local supervision is an important part of regulation, as it facilitates collection of information imperfectly reflected in reported measures, and that switching from onsite to offsite supervision can increase bank risk.

Suggested Citation

  • Yadav Gopalan & Ankit Kalda & Asaf Manela, 2021. "Hub-and-Spoke Regulation and Bank Leverage [Inconsistent regulators: evidence from banking]," Review of Finance, European Finance Association, vol. 25(5), pages 1499-1545.
    • Handle: RePEc:oup:revfin:v:25:y:2021:i:5:p:1499-1545.
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    File URL: http://hdl.handle.net/10.1093/rof/rfab019
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    Citations

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    Cited by:

    1. Kok, Christoffer & Müller, Carola & Ongena, Steven & Pancaro, Cosimo, 2023. "The disciplining effect of supervisory scrutiny in the EU-wide stress test," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    2. Arif, Salman & Donovan, John & Gopalan, Yadav & Morris, Arthur, 2024. "Pay for prudence," Journal of Accounting and Economics, Elsevier, vol. 77(1).
    3. Ha, Sangeun & Ma, Fangyuan & Žaldokas, Alminas, 2024. "Motivating collusion," Journal of Financial Economics, Elsevier, vol. 154(C).
    4. Biswas, Sonny & Koufopoulos, Kostas, 2022. "Bank capital structure and regulation: Overcoming and embracing adverse selection," Journal of Financial Economics, Elsevier, vol. 143(3), pages 973-992.

    More about this item

    Keywords

    Financial regulation; Bank supervision; Delegated monitoring; Offsite examinations;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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