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

Christian Leuz and João Granja

No 610, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: 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 wellcapitalized 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.

Keywords: Bank regulation; Enforcement; Loan Losses; Aggregate outcomes; Prudential oversight; Business lending; Entry and exit (search for similar items in EconPapers)
JEL-codes: E44 E51 G21 G28 G31 G38 K22 K23 L51 M41 M48 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: The death of a regulator: Strict supervision, bank lending, and business activity (2024)
Working Paper: The Death of a Regulator: Strict Supervision, Bank Lending, and Business Activity (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:610

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