Is the Fox Guarding the Henhouse? Bankers in the Federal Reserve, Bank Leverage and Risk-shifting

Lim, Ivan; Hagendorff, Jens; Armitage, Seth

Abstract

Nearly 30% of US banks employ at least one board member who currently serves (or has previously served) the Federal Reserve in a public service role. Public service roles take the form of Federal Reserve directorships or memberships in Federal Reserve advisory councils. We show that connections between banks and the Federal Reserve are linked to decreases in the sensitivity of bank leverage to risk. Further, connected banks extract larger public subsidies by shifting risk to the financial safety-net. Jointly, our results suggest that interactions between banks and regulators reduce supervisory effectiveness.

Citation

Lim, I., Hagendorff, J., & Armitage, S. (2019). Is the Fox Guarding the Henhouse? Bankers in the Federal Reserve, Bank Leverage and Risk-shifting. Journal of Corporate Finance, 58, 478-504. https://doi.org/10.1016/j.jcorpfin.2019.04.012

• Journal Article Type: Article
• Acceptance Date: Apr 25, 2019
• Online Publication Date: Apr 30, 2019
• Publication Date: 2019-10
• Deposit Date: Jul 27, 2020
• Publicly Available Date: Oct 30, 2020
• Journal: Journal of Corporate Finance
• Print ISSN: 0929-1199
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 58
• Pages: 478-504
• DOI: https://doi.org/10.1016/j.jcorpfin.2019.04.012
• Public URL: https://durham-repository.worktribe.com/output/1265493
• Related Public URLs: http://eprints.whiterose.ac.uk/148744/