Banks' Strategic Responses to Supervisory Coverage: Evidence from a Natural Experiment

Abstract

We study how supervisory coverage affects syndicated lending. Relying on an unexpected change in supervisory coverage, we document that the costs of bank credit for borrowers excluded from supervision decrease by approximately 18% relative to an otherwise similar control group. We also find that aggregate lending shifts to further reduce supervisory coverage, particularly for riskier deals. This reflects the action of larger and more leveraged banks, as smaller lenders shift their lending to increase supervisory coverage. This suggests that smaller lenders perceive net benefits of supervision through its potential to reduce information asymmetries within the syndicate.

Keywords: Bank Supervision, Syndicated Lending

JEL Classification: G21,G23,G28