Financial Regulation: Empirics
Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM
- Chair: Mark Egan, Harvard University
Costs of Rating-contingent Regulation: Evidence From the Establishment of “Investment Grade”
AbstractI assess unintended consequences for non-financial firms of rating-contingent regulation, without confounding factors prevalent in modern markets, by examining the 1936 unexpected inception of federal bank investment restrictions for bonds rated below investment grade. Using a difference-in-differences design, I find a persistent rise in speculative bond yields, even comparing bonds within the same firm, and declines in equity value and idiosyncratic volatility for firms reliant on external speculative debt financing. The increase in yields is lower for bonds near investment grade suggesting firms reduce volatility and deviate from otherwise optimal behavior to avoid higher funding costs from the regulation.
Investment Adviser Regulatory Jurisdiction and Reported Misconduct
AbstractWe examine a regulatory change in Dodd-Frank resulting in re-assignment of mid-sized adviser firms ($25-$100 million AUM) from SEC to state registration. We find that switching to state regulation increases the probability of client complaints by 25-50%. The effect obtains across-state, within-state, and in matched samples. It is largest among weakly monitored advisers: headquartered further from regulators, with less-sophisticated clients, and based in financially weak states. The effect is also larger among adviser representatives with histories of greater reported misconduct. Alleged damages increases by $90,000 per incident, with no decrease in the propensity to be dismissed. The results are consistent with weakened regulatory oversight leading to higher misconduct.
The Impact of Supervision on Bank Performance
AbstractWe introduce a novel instrument to identify exogenous variation in the intensity of supervision across U.S. bank holding companies based on the size rank of a firm within its Federal Reserve district. We demonstrate that supervisors record more hours at the largest firms in a district, even after controlling for size and other characteristics. Using a matched sample approach, we find that these “top” firms are less volatile, hold less risky loan portfolios and engage in more conservative reserving practices, but do not have lower earnings or slower asset growth. Given these firms are subject to similar rules, our results support the notion that supervision has a distinct role as a complement to regulation.
Federal Reserve Bank of New York
University of Kentucky
London Business School
- G2 - Financial Institutions and Services