Association for Public Policy Analysis & Management

Policymakers have a variety of tools and data sources to inform their decision-making processes. However, a regulator needs to interpret this data and understand how it reflects the situation facing groups under its purview in order to craft effective policies that improve societal welfare and further the regulator’s goals. These needs have become more pressing as data, policy goals, and policies themselves have grown more complex. In this paper, I assess the effectiveness and potential hazards of one of these tools, advisory groups to federal agencies, in the context of financial regulation. To the best of my knowledge, this is the first paper to estimate the effects of advisory group membership on regulatory capture and industry regulatory policy.

Federal advisory committees consist of experts working in the relevant subject area or industry and who are not federal employees. The Federal Advisory Committee Act of 1972 established the right of the President and executive branch agencies to form such groups to receive “advice and recommendations” about policy. Currently, over 1000 advisory groups exist within the federal government, working on policy topics ranging from electronic payment protocols to civil rights to data quality to radioactive material management. To mitigate potential conflicts of interest and concerns about regulatory capture, advisory groups may not have operational functions in setting policy and group meetings must be open to the public except under limited circumstances. Advisory groups can use their collective expertise to provide policymakers important context behind data trends and understanding of the concerns of industry leaders, allowing regulators to make the best use of available industry data and craft appropriate policies to achieve goals.

After the recent financial crisis, financial sector regulation has undergone significant changes. From the implementation of stress testing under Dodd-Frank to recent changes in the interpretation of agency guidance in the context of regulations, regulators have made many decisions that significantly impact the functioning of the industry and the macroeconomy. Financial regulators created 520 new rules over 2010-2016 (GAO, 2018). In many cases, one of the 28 current federal banking advisory groups had input in the creation of proposed and final rules.

In this paper, I estimate the effect of membership in a specific small bank advisory group on bank profitability. I use exogenous variation in the timing of membership changes, set at the time of committee formation by the organizing agency, to perform difference-in-difference and event study analyses of the effect of committee membership. Preliminary results indicate that committee membership is associated with significant increases in a bank’s own profitability, an indication that even advisory groups with no formal decisionmaking authority can, to a degree, capture regulators. Preliminary results also show that profits increase at banks with loan portfolios similar to those of committee members, suggesting that committee input may lead to better policies that allow industry members to find valuable loan opportunities. These results highlight that advisory group members can benefit from regulatory capture while also providing regulators with good policy advice.