Access Type

Open Access Dissertation

Date of Award

January 2013

Degree Type

Dissertation

Degree Name

Ph.D.

Department

Political Science

First Advisor

Marjorie Sarbaugh-Thompson

Abstract

This dissertation examines the process of agency capture at four federal bank regulatory agencies leading up to the 2008 financial crisis: the Federal Deposit Insurance Corporation, the Federal Reserve, The Office of the Comptroller of the Currency, and The Office of Thrift Supervision. Though public administration and policy scholars have moved away from capture theory toward a more pluralistic understanding of agency policymaking, recent events like the Gulf oil spill, coal mining disasters, and the 2008 financial crisis have renewed attention to the role lax regulation plays in disasters and crises. As such, I set out to explore whether banks captured financial regulators, capture's causes, and potential recommendations for improving regulation.

To do so, I relied on multiple methods of analysis to investigate three data sources: 1) content analysis of Office of Inspector General reports about regulatory problems preceding bank failures, 2) interrupted time series analysis of trends in agency enforcement actions, and 3) a statistical comparison of the proportion of bank failures and bank bailout recipients supervised by each agency.

Evidence for capture is mixed. Interrupted time series analysis of trends over time in the agencies' enforcement actions show that the agencies are responsive to political controls and crises, not just the interests of the banking industry. Further, across performance measures, no agency's banks consistently performed the worst, which we would not expect to find if an agency were captured because of the lax treatment capture entails. On the other hand, enforcement increases at the agencies retrospectively, after crises hit, indicating capture in the short term. Though agencies had the skill and capacity needed to vigorously enforce their rules, they lacked the will to use it. Further, content analysis shows considerable evidence of lax enforcement for a large majority of failures across all four agencies. My analysis of these reports also reveals that the high degree of discretion given to bank examiners is a primary cause of capture.

My findings have implications for both theory and practice. With respect to theory, my findings run counter to, and help refine, the existing literature on public policy implementation, public administration, and bureaucratic politics. This literature suggests that discretion is a source of agency power. However, my findings indicate that in a policy area like banking regulation, which is highly complex and of low public salience, bureaucratic discretion undermines rather than enhances the power of regulatory agencies. The absence of detailed rules makes it difficult to take strong enforcement action against powerful clients because examiners need the hard and fast rules to justify taking action.

My findings also help scholars determine what is and is not capture by distinguishing among industry failure, regulatory failure, and capture. Though observers often fall into the trap of observing disasters and crises and inferring capture preceded these outcomes, we must be careful when doing so because these events can occur in the absence of capture and despite appropriate agency supervision. Further, my findings also suggest that capture occurs on a continuum, which can vary in its strength and scope. To help determine the strength and scope of capture, I developed a scope of capture typology to establish the scope of capture within the industry, agency, and wider political system. This typology helps observers draw more nuanced and accurate conclusions about whether an agency is captured and the best place within the agency or the political system to make preventative changes.

With respect to practice, my findings suggest that the Office of Thrift Supervision, which is often singled out as the worst of the four banking regulators and was eliminated with the passage of the Dodd-Frank Act, was unfairly scapegoated. Many of the problems it had were just as prominent at the other three agencies, suggesting that the problems in banking regulation will not be eliminated by abolishing one agency.

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