POLITICAL IDEOLOGY IN REGULATORY OVERSIGHT: EVIDENCE FROM BANKING

Abstract

This study investigates the influence of bank regulators’ political ideology on their enforcement actions. I show that regulators with Republican leanings are less inclined to initiate enforcement actions against the banks they oversee. Furthermore, Republican regulators use more positive language, incorporate additional numerical data, and emphasize financial matters within their enforcement files. Further results show that the regulatory institution and bank transparency can moderate the impact of regulators’ personal ideologies. In addition, banks exploit the opportunity for less stringent oversight by strategically relocating their branches to states where Republican regulators are appointed. Laxer supervision also encourages banks to increase risk-taking behavior. Finally, I show the association between supervision by Republican regulators and heightened levels of bank failures.