The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity

João Granja and Christian Leuz

No 4, LawFin Working Paper Series from Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin)

Abstract: 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.

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: 2020
New Economics Papers: this item is included in nep-cba, nep-cfn, nep-ent, nep-fdg, nep-law, nep-mac and nep-reg
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https://www.econstor.eu/bitstream/10419/244684/1/lawfin-wp04.pdf (application/pdf)

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 (2018)
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:lawfin:4

DOI: 10.2139/ssrn.3092284

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