The death of a regulator : strict supervision, bank lending and business activity

  • An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well capitalized banks and those more affected by the new regime. These findings suggest that stricter supervision operates not only through capital but can also overcome frictions in bank management, leading to more lending and a reallocation of loans. Consistent with the latter, we find increases in business entry and exit in counties with greater expose to OTS banks.

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Metadaten
Author:João Granja, Christian LeuzORCiDGND
URN:urn:nbn:de:hebis:30:3-479749
URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3289934
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 610
Series (Serial Number):CFS working paper series (610)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Language:English
Year of Completion:2018
Year of first Publication:2018
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2018/11/29
Tag:Aggregate outcomes; Bank regulation; Business lending; Enforcement; Entry and exit; Loan Losses; Prudential oversight
Issue:October 2017
Page Number:61
HeBIS-PPN:439817110
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Sammlungen:Universitätspublikationen
Licence (German):License LogoDeutsches Urheberrecht