Working Paper: NBER ID: w29938
Authors: Marco Del Angel; Gary Richardson
Abstract: Regulatory independence forms a foundation for modern financial systems. To illuminate the value of this ubiquitous institution, we examine a Progressive Era policy experiment in which hitherto independent regulators came under gubernatorial supervision. After this change, failure rates declined during gubernatorial election campaigns for banks under gubernatorial jurisdiction. Declines did not occur during campaigns for other officials or for nationally chartered banks. Declines in bank resolutions during campaigns reduced business bankruptcies. We corroborate these claims with new data and novel IV regressions. Our results indicate that political subservience of financial regulators links electoral and economic cycles.
Keywords: regulatory independence; financial stability; bank resolution; political supervision; Progressive Era
JEL Codes: G01; G21; G33; H1; H7; K2; L51; N1; N2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| gubernatorial election campaigns (K16) | bank resolution rates (G28) |
| gubernatorial election campaigns (K16) | business bankruptcies (K35) |
| bank resolution rates (G28) | business bankruptcies (K35) |