The Economics of Bank Supervision

58 Pages Posted: 2 May 2016

See all articles by Thomas M. Eisenbach

Thomas M. Eisenbach

Federal Reserve Banks - Federal Reserve Bank of New York

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2016

Abstract

We study bank supervision by combining a theoretical model distinguishing supervision from regulation and a novel dataset on work hours of Federal Reserve supervisors. We highlight the trade-offs between the benefits and costs of supervision and use the model to interpret the relation between supervisory efforts and bank characteristics observed in the data. More supervisory resources are spent on larger, more complex, and riskier banks. However, hours increase less than proportionally with bank size, suggesting the presence of technological scale economies in supervision. The data also show reallocation of supervisory hours at times of stress and in the post-2008 enhanced supervisory framework for large banks, providing evidence of constraints on supervisory resources. Finally, we show theoretically limits to assessing supervisory success based on ex-post outcomes, as well as benefits of ex-ante commitment policies.

Suggested Citation

Eisenbach, Thomas M. and Lucca, David O. and Townsend, Robert M., The Economics of Bank Supervision (April 2016). NBER Working Paper No. w22201. Available at SSRN: https://ssrn.com/abstract=2773431

Thomas M. Eisenbach (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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HOME PAGE: http://teisenbach.github.io/

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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