Supervising Failing Banks

Sergio Correia, Stephan Luck and Emil Verner

No 34343, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We examine the role of banking supervision in identifying and disciplining failing banks. We show that bank failures typically result from supervisory closure decisions based on hard information about book equity. Yet hard information is itself partly produced by supervision, as supervisors require troubled banks to recognize potential losses. To establish causality, we exploit exogenous variation in supervisory strictness during the Global Financial Crisis. Stricter supervision leads to more loss recognition, lower book equity, and a higher likelihood and speed of closure. It also reduces FDIC resolution costs at failure but can contract credit, consistent with a trade-off between supervisory strictness and forbearance.

JEL-codes: G0 G01 G21 (search for similar items in EconPapers)
Date: 2025-10
New Economics Papers: this item is included in nep-fdg, nep-fmk and nep-reg
Note: CF ME
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