PARTICIPANTS
Amit Seru, Elena Afanasyeva, Gustavo Del Angel, Jonathon Berk, Nick Bloom, David Brady, John Cochrane, Pedro Da Costa, Steve Davis, Paul Gregory, Steve Haber, Bob Hall, Tim Kane, David Mauler, Jonathon Meer, Josh Rauh, John Shoven, George Shultz, John Taylor

ISSUES DISCUSSED
Amit Seru, Professor of Finance at the University of Chicago’s Booth School of Business, discussed his recent work on the topic “Evidence on the Revolving Door, Regulatory Capture, and Policy Inconsistencies.”

Seru first presented evidence of inconsistency in US banking regulation. Jurisdiction of US financial regulatory agencies is extremely complex and often overlaps. In such cases, regulators often face different incentives. Exploiting an exogenous, pre-determined rotation between federal and state regulators over each state bank, Seru showed that federal regulators are more likely than state regulators to downgrade a bank’s CAMELS rating. Conversely, state regulators are more likely to upgrade a bank’s CAMELS rating. Higher relative leniency of state regulators is associated with higher bank failures, lower repayment of TARP money, and higher discounts on auctioned assets, looking across the cross-section of states.

Seru then described trends in worker flows between the private financial sector and public sector. His evidence is based on data gathered from publically available curricula vitae of federal and state US banking regulators. Worker flows from private to regulatory jobs are strongly counter-cyclical. Also, retention in regulatory agencies has declined over time.

Lastly, Seru discussed the failure of models in regulatory settings. Seru focused on the recent example of regulatory agencies using statistical default models prior to the crisis which were developed during the originate-and-hold regime of mortgage issuance. The models under-predicted risk, failing to account for the Lucas critique as securitization became more common. Blind use of statistical default models in the regulation of market participants is dangerous— incentives can change the meaning of hard information variables.

Seru concluded by reiterating that a simple view of regulation being ineffective is incomplete. In reality, issues lie in the implementation itself. Often, incentives of regulators are not aligned, models and tools used by regulators are insufficient, and regulatory agencies lack adequate human capital. Unfortunately, research is hindered by the reluctance of regulators to share data.