Why the ‘revolving door’ shouldn’t stop turning
Popular wisdom says the flow of workers between regulatory agencies and Wall Street results in lax oversight. The data suggest it may help watchdogs attract talent.
- Critics of the “revolving door” say it encourages regulators to go easy on banks, since they ultimately want to work for the banks they oversee. But research by Chicago Booth’s Amit Seru, with David Lucca of the New York Fed and Francesco Trebbi of the University of British Columbia, suggests that the business cycle, more than quid pro quo, powers the revolving door (see left chart).
- Tracing the career paths of 35,000 workers, they find that regulators move to Wall Street in a robust economy, and bankers move into regulation when the economy is weak.
- When enforcement increases, such as after the 2007–10 financial crisis, more bankers tend to become regulators and more regulators tend to become bankers (see right chart). This suggests a “regulatory schooling” view of the interaction between Wall Street and regulators: workers move from banks to oversight agencies to study complex rules, before moving back to the private sector to cash in.
- Employee tenure in regulatory agencies has been declining, particularly among those with advanced degrees. Restricting the revolving door could make regulatory jobs less attractive, forcing well-qualified candidates to choose between a career solely in regulation or purely on Wall Street.