Technology and Risk in Banking and Non-Bank Financial Intermediaries
Paper Session
Sunday, Jan. 5, 2025 1:00 PM - 3:00 PM (PST)
- Chair: Christa H.S. Bouwman, Texas A&M University
The Disciplining Effect of Bank Supervision: Evidence from SupTech
Abstract
Regulators around the world increasingly rely on supervisory technologies (SupTech) to support bank supervision. Yet, little is known about how the use of SupTech could affect the banking sector. To address this knowledge gap, we use administrative data from the Central Bank of Brazil to analyze how supervisory actions arising from its SupTech application affect bank balance sheets and lending, and the potential spillover effects to the real economy. We find that the supervisory actions induce banks to reveal inconsistencies in their reported credit risk and to tighten creditto less creditworthy firms, thereby reducing bank risk-taking. In turn, we find that this credit tightening affects the performance of less creditworthy firms that borrow from affected banks. Further tests suggest that these results are due to a supervisory scrutiny channel, which induces banks to become more prudent. Overall, our findings provide novel insights into the role of SupTech in bank supervision
Failing Banks
Abstract
Why do banks fail? We create a panel covering most commercial banks from 1863 through 2023 and study the history of failing banks in the United States. Failing banks are characterized by rising asset losses. Losses are typically preceded by rapid lending growth, financed by non-core funding. Bank failures, including those that involve depositor runs, are highly predictable based on bank fundamentals, even in the absence of deposit insurance and a central bank. We construct a new measure of systemic risk using bank-level fundamentals and show that it forecasts the major waves of banking failures in U.S. history. Altogether, our evidence suggests that failures caused by runs on healthy banks are uncommon. Rather, the ultimate cause of bank failures and banking crises is almost always and everywhere a deterioration of bank fundamentals.Transformation of Risks across Banks and NBFIs
Abstract
We argue that the rapid asset growth of nonbank financial intermediaries (NBFIs) relative to banks has been accompanied by transformations of risks that increase the interconnectedness of the two sectors. First, the balance sheets of the two sectors exhibit large liability-dependencies. Second, both routinely and in times of stress, banks fund NBFIs through senior loans and credit lines that NBFIs use for acquiring junior credit claims, warehouse financing, and liquidity management. Third, the systemic risks and stock returns of the sectors are increasingly connected. We finish with a clarifying conceptual framework that suggests policy approaches.Discussant(s)
Christine Parlour
,
University of California-Berkeley
Philip Strahan
,
Boston College
Aditya Sunderam
,
Harvard University
Juliane Begenau
,
Stanford University
JEL Classifications
- G2 - Financial Institutions and Services