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Role of Regulators and Supervisors in Regulation

Paper Session

Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, 212-213-214
Hosted By: American Finance Association
  • Chair: Amit Seru, Stanford University

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

Joao Granja
,
University of Chicago
Christian Leuz
,
University of Chicago

Abstract

An important question in banking is how strict supervision affects bank lending and in turn local business activity. Forcing banks to recognize losses could choke off lending and amplify local economic woes, especially after financial crises. But stricter supervision could also lead to changes in how banks assess loans and manage their loan portfolios. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) – a large change in prudential supervision, affecting ten percent of all U.S. depository institutions. Using this event, we 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. We then analyze the lending effects of this regulatory change and show that former OTS banks increase small business lending by approximately 10 percent. This increase stems primarily from well-capitalized banks and those more affected by the new regime. These findings suggest that stricter supervision operates not only through capital but can also overcome frictions in bank management, leading to more lending and a reallocation of loans. Consistent with the latter, we find increases in business entry and exit in counties with greater expose to OTS banks.

Seeking My Supervisor: Evidence from the Centralization of Banking Supervision in Europe

Itzhak Ben-David
,
Ohio State University and NBER
Giovanni Cerulli
,
National Research Council of Italy
Franco Fiordelisi
,
University of Rome III, and Middlesex University
David Marques-Ibanez
,
European Central Bank

Abstract

We study the behavior of banks around the announcement of the centralization of banking supervision in Europe. On December 2012, European authorities announced that within a year the supervisory responsibilities for mid-size and large banks would be transferred to the European Central Bank. We document that following the announcement banks around the size threshold shrank their assets by contracting their credit book and liquid assets. Then, we use the size threshold to measure the effects of central supervision on banks. After accounting for banks’ strategic behavior, the effects of central supervision are materially larger than previously-thought.

The Value of Regulators as Monitors: Evidence from Banking

Emilio Bisetti
,
Carnegie Mellon University

Abstract

While conventional wisdom suggests that regulation is costly for shareholders, agency theory predicts a positive role of regulation in reducing shareholder monitoring costs. I study this trade-off by exploiting an unexpected decrease in small-bank reporting requirements to the Federal Reserve using a regression discontinuity design. Using the reporting change as a negative shock to regulatory monitoring by the Fed, I find that reduced Fed monitoring leads to a 1% loss in Tobin's q and a 7% loss in equity market-to-book. I show that these losses come from increased internal monitoring expenditures, managerial rents, and monitoring conflicts between shareholders. My results are among the first to quantify the shareholder value of monitoring.
Discussant(s)
David Lucca
,
Federal Reserve Bank of New York
Laura Blattner
,
Harvard University
Mark Egan
,
Harvard University
JEL Classifications
  • G2 - Financial Institutions and Services