Financial Regulatory Agency Behavior: Oscillating Priorities
ABSTRACT
Gleaning from political science and economic theories of organizational performance, I propose a theoretical framework positing that financial regulators have multiple, competing goals whose priorities legislators leave ambiguous. Left with organizational goal ambiguity, financial regulatory agencies become information processors that engage in intra-agency coordination and have the broad discretion to transpose these priorities onto their internal agency structure. Precisely which goal the regulator will prioritize hinges on the constraint factors of path dependency, political control, and economic turbulence. We can observe an agency’s goal priorities through its internal organizational choices and its allocation of resources. Through the lens of this theoretical framework, I have analyzed the annual reports of the United States’ prudential regulators (the Fed, the OCC, and the FDIC) from the 1960s to 2006; specifically, I collected data on their internal organization and the examination frequency of prudential regulation vis-à-vis consumer compliance. I show empirically that over the decades, the regulators’ consumer compliance priorities oscillated in response to the internal and external constraints of the agencies’ own history, the political environment, and any financial crises. I argue that these three constraint factors are the critical determinants of prudential regulators’ performance of consumer mandates. The constraint factors’ persistent influence and the agencies’ own ability to shape their internal agency structure challenges the view that regulatory structure has been an important determinant of regulatory failure. During the first stage of my analysis, covering the 1960s to the late 1970s, the prudential regulators first resisted, then accepted, their legislatively assigned roles regarding consumer protection (the “Institution Building Period”). During the 1980s, legislative changes forced the prudential regulators to dismantle some of their consumer-focused functions as the deregulatory political environment and the banking crisis of the 1980s led to radical changes in the U.S. banking industry (the “Deregulation and Banking Crisis Period”). With the conclusion of the banking crisis in the early 1990s, and until 2006, the prudential regulators briefly re-built consumer functions, then slowly de-prioritized them in the years leading up to the subprime mortgage crisis (the “Inter-crisis Period”).