Estimating Changes in Supervisory Standards and Their Economic Effects

51 Pages Posted: 20 Oct 2012

See all articles by William F. Bassett

William F. Bassett

Board of Governors of the Federal Reserve System (FRB)

Seung Jung Lee

Board of Governors of the Federal Reserve System

Thomas Spiller

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2012

Abstract

The disappointingly slow recovery in the U.S. from the recent recession and financial crisis has once again focused attention on the relationship between financial frictions and economic growth. With bank loans having only recently started growing and still sluggish, some bankers and borrowers have suggested that unnecessarily tight supervisory policies have been a constraint on new lending that is hindering recovery. This paper explores one specific aspect of supervisory policy: whether the standards used to assign commercial bank CAMELS ratings have changed materially over time (1991-2011). We show that models incorporating time-varying parameters or economy-wide variables suggest that standards used in the assignment of CAMELS ratings in recent years generally have been in line with historical experience. Indeed, each of the models used in this analysis suggests that the variation in those standards has been relatively small in absolute terms over most of the sample period. However, we show that when this particular aspect of supervisory stringency becomes elevated, it has a noticeable dampening effect on lending activity in subsequent quarters.

Keywords: Bank Supervision and Regulation, Financial Frictions, CAMELS Ratings

JEL Classification: G21, G28, L25

Suggested Citation

Bassett, William F. and Lee, Seung Jung and Spiller, Thomas, Estimating Changes in Supervisory Standards and Their Economic Effects (August 24, 2012). Available at SSRN: https://ssrn.com/abstract=2164503 or http://dx.doi.org/10.2139/ssrn.2164503

William F. Bassett

Board of Governors of the Federal Reserve System (FRB) ( email )

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

Seung Jung Lee (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Washington, DC 20551
United States

Thomas Spiller

Board of Governors of the Federal Reserve System ( email )

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

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