The Effect of Bank Supervision and Examination on Risk Taking: Evidence from a Natural Experiment

John Kandrac and Bernd Schlusche

The Review of Financial Studies, 2021, vol. 34, issue 6, 3181-3212

Abstract: We exploit an exogenous reduction in bank supervision and examination to demonstrate a causal effect of supervisory oversight on financial institutions’ risk taking. The additional risk took the form of risky lending, faster asset growth, and a greater reliance on low-quality capital. This response to less oversight boosted banks’ odds of failure. Lastly, we show that the reduction in oversight capacity led to more costly failures because there were longer delays in closing insolvent institutions, and because more bad assets were passed to the government insurance fund.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (11)

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