Revolving door between finance executives and financial regulation..who benefits and how?

A really interesting paper given the times we are in. Despite the huge criticism of finance sector, both its employees and regulators continue to remain coveted jobs.

The authors build it as inflow vs outflow kind of problem:

This paper traces career transitions of federal and state U.S. banking regulators from a large sample of publicly available curricula vitae, and provides basic facts on worker flows between the regulatory and private sector resulting from the revolving door. We find strong countercyclical net worker flows into regulatory jobs, driven largely by higher gross outflows into the private sector during booms. These worker flows are also driven by state-specific banking conditions as measured by local banks’ profitability, asset quality and failure rates. The regulatory sector seems to experience a retention challenge over time, with shorter regulatory spells for workers, and especially those with higher education. Evidence from cross-state enforcement actions of regulators shows gross inflows into regulation and gross outflows from regulation are both higher during periods of intense enforcement, though gross outflows are significantly smaller in magnitude. These results appear inconsistent with a “quid-pro-quo” explanation of the revolving door, but consistent with a “regulatory schooling” hypothesis.

Further, people are having shorter spells at Washington:

Next, using information obtained from the workers’ CVs and the fact that our dataset is longitudinal, we examine the selection of individuals into and out of the regulatory sector by assessing which individuals enter and exit banking regulation over the business cycle, as a function of their human capital (i.e., their education levels) and skills/connections (i.e., their seniority in the regulatory organization). We find that the best talent, as proxied by higher human capital, has shorter regulatory spells because of higher outflows to the private sector. We also find that more senior staff, not surprisingly, spend more time in regulation. While we find no significant differences in the business cycle sensitivity across different human capital levels, overall, the regulatory sector appears to face a retention challenge when it comes to individuals with higher human capital based on their shorter regulatory spells. Consistent with this finding, we also find that regulatory spells have been declining in the past twenty-five years. For example, while about 88% of workers that started working in regulation in 1988 spent three or more years in regulation, only 64% of workers that started working did so two decades later.

What is meant by regulatory schooling vs quid pro quo;

We briefly turn next to an analysis that explores aggregate regulator mobility as a function of regulatory actions. According to one prominent view (the “quid-pro-quo” view), future employment
opportunities in the private sector affects, as a quid pro quo, the strictness of actions of a regulator while the individual is employed in the regulatory sector. This hypothesis implies that we should
observe lower gross outflows from regulation to private banking during periods of high enforcement activity. Understanding whether this hypothesis may be at play is important since destabilizing banking crises have often been ascribed to weak regulatory oversight. Based on an alternative view of the revolving door (the “regulatory schooling” view) regulators may instead have an incentive to favor complex rules because “schooling” in these regulations enhance regulators future earnings, should they transition to the private sector.Such a hypothesis would imply high gross inflows into regulation at times of higher regulatory intensity as workers are schooled in the new rules as well as high gross outflows from regulation into the private sector as regulators earn returns from schooling in the new rules. According to the regulatory schooling view, inefficiencies may derive not from laxity, but on the contrary from more complex regulations

Hmmm…design complex rules during tough times and gain laters simplifying them for your private sector employers..


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