The Effects of Supervision on Bank Performance: Evidence from Discontinuous Examination Frequencies

36 Pages Posted: 24 Aug 2012 Last revised: 7 Mar 2014

See all articles by Marcelo Rezende

Marcelo Rezende

Board of Governors of the Federal Reserve System

Jason Wu

Hong Kong Monetary Authority

Date Written: February 18, 2014

Abstract

This paper estimates causal effects of supervision on bank performance using discontinuities in the minimum frequency of examinations required by regulation. This frequency is discontinuous at a value of bank assets that varied over time, allowing us to break the endogeneity between supervision and performance and to separate the effects of examinations from confounding effects of other banking policies that are triggered by asset thresholds too. We find that more frequent examinations increase profitability by decreasing loan losses and delinquencies. This suggests that supervisors limit the risks that banks are exposed to and, consequently, limit banks’ losses on risky assets.

Keywords: Banking Regulation, Banking Supervision, Bank Examinations

JEL Classification: G21, G28

Suggested Citation

Rezende, Marcelo and Wu, Jason, The Effects of Supervision on Bank Performance: Evidence from Discontinuous Examination Frequencies (February 18, 2014). Midwest Finance Association 2013 Annual Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2135017 or http://dx.doi.org/10.2139/ssrn.2135017

Marcelo Rezende (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jason Wu

Hong Kong Monetary Authority ( email )

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

HOME PAGE: http://https://sites.google.com/site/jasonwuresearch/

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