Supervising Failing Banks

Sergio Correia, Stephan Luck and Emil Verner

No 1168, Staff Reports from Federal Reserve Bank of New York

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.

Keywords: banking supervision; financial stability; financial regulation (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 G28 K23 N20 N24 (search for similar items in EconPapers)
Pages: 88
Date: 2025-10-01
New Economics Papers: this item is included in nep-reg
Note: Revised July 2026.
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Citations: View citations in EconPapers (3)

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DOI: 10.59576/sr.1168

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