Publications
Publications
- 2011
The Performance Effects of Regulatory Oversight
Abstract
This paper explores the heterogeneity in firm performance that can arise from exogenously varying levels of oversight in regulated industries. We use data on the performance of U.S. commercial banks to show that banks located physically closer to their supervisors' field offices accrue significant performance differentials driven by lower administrative costs: two-hour difference in examiner travel time corresponds to an increase in expense levels of 1 to 2 percent of capital that are not explained by leverage. Greater supervisor distance is not associated with either higher interest margins or non-performing loans, which implies that closely supervised banks enjoy higher risk-adjusted returns. Our identification strategy relies on the banking industry's overlapping regulatory jurisdictions to disentangle the confounding geographic factors from the effect of supervision. We hypothesize that co-located firms' advantages accrue due to their banks' lower costs of information exchange, particularly the exchange of soft information and knowledge of the regulatory framework. In support of this conjecture, we find that small banks benefit disproportionately from proximity to their supervisor. The effect is not reduced over time, implying that relationships, rather than the cost of actual physical information transmission, drives the effect. Lastly, we find that the financial crisis triggered a more aggressive regulatory stance that eliminated the benefits from proximity completely.
Keywords
Citation
Wilson, Kristin, and Stan Veuger. "The Performance Effects of Regulatory Oversight." 2011.