Reverse Revolving Doors Revisited: On Bankers and Regulators

• Applicant: Dr. Stefano Colonnello
• Subject Area: Accounting and Finance ; Economic Policy, Applied Economics
• Term: from 2018 to 2021
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 404779472

We investigate if, why, and under which conditions senior executives from the financial industry seek employment with supervisory authorities. Understanding the mechanics of this job market is of eminent importance to facilitate the efficient and effective transition from national supervisory regimes towards a stable European Banking Union and avoid financial instability if goal conflicts and resulting rent seeking goes undetected. The appointment of supervisors in the financial industry is known as the revolving doors phenomenon. Our focus, in turn, is on executives that migrate to the regulator. Experience in the financial industry may facilitate the institutional accumulation of human capital on technical matters, thereby improving the quality of supervision and regulation. Yet, previous industry spells may entail incentives to deviate from socially optimal outcomes. Bonds with former employers in the financial industry may render policy makers more prone to cronyism and regulatory capture. We identify the relative importance of these opposing forces and its causes and ask two specific questions concerning reverse revolving doors: Does the availability of employment opportunities in the regulatory sector affect bankers' career choices? How do regulators' past experiences in regulated entities affect the implementation and/or the design of rules (e.g., in terms of complexity)?The interaction of national and supranational authorities in Europe provides a perfect testing ground. Given the highly endogenous nature of the phenomena at hand, we use a difference-in-difference methodology that we expose to a menu of alternative identification strategies in terms of exogenous shocks to explain banker’s employability as regulators. As a negative exogenous shock to employability, we exploit their bank’s inclusion into the list of institutions subject to supervision by the Single Supervisory Mechanism (SSM). Second, we use staggered changes of bank SSM status as the set of systemically relevant banks changed over time. Third, we exploit the introduction of bonus caps under Capital Requirements Directive (CRD IV) that came into force on January 1, 2014 to identify potential differential employability effects between compliant and non-compliant bank executives. Fourth, to evaluate the importance of the revolving doors phenomenon on supervisory and rule-making activity, we will exploit the staggered introduction of so-called cooling-off periods across European countries, which restrict civil servants moves to the private sector. The introduction of cooling-off periods exogenously increases frictions in worker flows between the banking and the regulatory sector, and can be used in a difference-in-differences approach. All in all, the proposed analysis can shed light on the welfare implications of lingering relationships between bankers and their supervisors.

• DFG Programme: Research Grants
• Co-Investigator: Professor Dr. Michael Koetter