The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
Center for Financial Studies Working Paper No. 610, 2023
Posted: 16 Dec 2018 Last revised: 6 Nov 2023
There are 3 versions of this paper
The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity
The Death of a Regulator: Strict Supervision, Bank Lending, and Business Activity
Date Written: October 1, 2023
Abstract
We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of supervision on bank lending and bank management. We first show that the OTS replacement resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially in banks that changed management practices following the supervisory transition. These findings suggest that stricter supervision operates not only through the enforcement of loss recognition and capital adequacy, but can also act as a catalyst for operational changes that correct deficiencies in bank management and lending practices, which in turn increase lending.
Keywords: Bank regulation, Bank supervision, Prudential oversight, Enforcement, Management practices, Loan losses, Credit supply
JEL Classification: E44, E51, G21, G28, G32, G38, K22, K23, M41, M48
Suggested Citation: Suggested Citation