Reverse Revolving Doors Revisited: On Bankers and Regulators
Economic Policy, Applied Economics
Final Report Abstract
The expertise and biases of individuals in charge of designing and implementing banking regulation and supervision can have relevant real effects by favoring or undermining financial stability. The exchange of workers between the supervisory sector and the banking sector has the potential to shape such expertise and biases: the empirical question is whether the positive effects of better expertise linked to having held positions in banking trumps the possible bias stemming from proximity with supervised entities. A preliminary and necessary step to address this question is to measure the pervasiveness of worker flows between the two sectors. This project undertakes this task by looking at the career trajectories of executive directors of the national banking authorities of the ten largest European economies. The Authors document that more than one third of such directors have previous significant experience in the finance industry. In other words, the reverse revolving door from banking to supervision is an economically important phenomenon. Next, the project shows that banks’ investors value less the appointment of directors without finance background on the board of their supervisors relative to directors that previously held a finance position. The value enhancing effects is even more pronounced when the previous position was exactly at the supervised entity. These results hint to the importance of bias in the supervisory activity of directors with a finance background. Finally, the project takes a step back, providing an anatomy of remuneration practices of top employees in European banks and studying how regulating these practices can impact financial stability. The Authors document that a cap on the variable-to-fixed pay ratio for bankers does not lead to a reduction in risk taking. Next, the project shows that talent scalability is crucial in driving the positive firm size-managerial pay relationship in banking. Then, the project illustrates that banks’ adjustment to financial distress affects bankers by reducing their number rather than their pay. The results of the project contribute to the policy debate on a number of dimensions. First, by raising awareness about the prevalence of personal ties between supervised and supervising entities, it can inform policies aimed at improving selection processes of banking supervisors. Second, the project highlights how one-size-fits-all restrictions on bankers pay may be ineffective or even counterproductive, producing the opposite effect relative to the goals of policy makers. Results of the project were featured on major media outlets like The Telegraph (United Kindgom) and Les Echos (France): Bank bonus cap pushed up salaries by €1m and failed to cut risk-taking, The Telegraph, https://www.telegraph.co.uk/business/2019/04/15/bank-bonus-cap-pushed-salaries-1m-failed-cut-risk-taking/ Nouvelle charge contre le plafond des bonus, Les Echos, https://www.lesechos.fr/finance-marches/banque-assurances/plafonner-les-bonusincite-a-la-prise-de-risque-selon-une-etude-1016541
