The incentives of regulators: Evidence from banking

Abstract

States with politically appointed bank supervisors are more liberal in allowing entry than states with bureaucratic supervisors, contrary to Eckert's hypothesis and his results on taxi regulation. While our results disconfirm his, they may simply be evidence that the hypotheses have yet to be framed properly and derived from a well-specified model of lifetime utility maximization by regulators. For example, the risk of bank failures which result from lax regulation of entry might be discounted more by the short-term political appointee than by the career bureaucrat. In addition, we have found that the dual regulatory system in banking does not by itself undo the outcomes of different state regulatory regimes on entry. Why this should be the case remains to be explored. Theories of capture of the regulatory process by affected parties are also not borne out by our estimates of equation (3). Until we know more about the costs, benefits, and alternative methods of influencing regulatory decisions, however, we cannot claim to have evidence for Peltzman's (1976) interest group model. Testing of such a model will require the use of a system of simultaneous equations.