Hub-and-Spoke Regulation and Bank Leverage

Abstract Regulators often delegate monitoring to local supervisors, which can improve information collection, but also lead agency problems and capture. We document that following the closure of a US bank regulator’s field offices, banks they previously supervised actively increased their risk failure by distributing cash, increasing leverage, lending more than similar at same time place. Supervisor proximity is channel through these effects operate. Our findings suggest supervision an important part regulation, as it facilitates collection imperfectly reflected in reported measures, switching from onsite offsite increase risk.