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

João Granja and Christian Leuz

Journal of Financial Economics, 2024, vol. 158, issue C

Abstract: We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of supervision on bank lending and bank management. We first show that the OTS replacement resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially in banks that changed management practices following the supervisory transition. These findings suggest that stricter supervision operates not only through the enforcement of loss recognition and capital adequacy, but can also act as a catalyst for operational changes that correct deficiencies in bank management and lending practices, which in turn increase lending.

Keywords: Bank regulation; Bank supervision; Prudential oversight; Enforcement; Management practices; Loan losses; Credit supply (search for similar items in EconPapers)
JEL-codes: E44 E51 G21 G28 G32 G38 K22 K23 M41 M48 (search for similar items in EconPapers)
Date: 2024
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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:eee:jfinec:v:158:y:2024:i:c:s0304405x24000941

DOI: 10.1016/j.jfineco.2024.103871

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