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An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to 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. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through capital but can also correct deficiencies in bank management and lending practices, leading to more lending and a reallocation of loans.
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.
Compliance with prevailing accounting standards is induced if the expected disadvantage due to sanctions imposed if non-compliance is detected outweighs the advantage of noncompliant accounting choices. The expected disadvantage materialises the threat potential of sanctions imposed by an enforcement agency. The capital market mechanism unfolds an important threat potential if companies expect an adverse share price reaction suite to enforcement actions. Enforcement agencies in turn can make use of this capital market related sanction by releasing information on defections to the market after the settlement of an investigation. The present contribution analyses the capital market reaction on accounting standards enforcement activities of the British Financial Reporting Review Panel (FRRP). After a brief introduction into the legal basis and working procedure of the Panel, the analysis of its activities will serve a dual purpose: firstly, the significance of capital market related sanctions for the overall enforcement regime will be elaborated upon. Secondly, the extent to which capital market related sanctions accomplish their function within the overall enforcement regime will be assessed empirically. The results of the empirical analysis suggest that the capital market related sanctioning by the FRRP may not unfold a sufficient threat potential which is a prerequisite for compliance enhancement.