The Effect of Bank Supervision on Risk Taking: Evidence from a Natural Experiment

54 Pages Posted: 22 Mar 2017 Last revised: 16 Jan 2019

See all articles by John Kandrac

John Kandrac

Board of Governors of the Federal Reserve System

Bernd Schlusche

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: January 15, 2019

Abstract

We exploit an exogenous reduction in bank supervision to demonstrate a causal effect of supervisory resources on financial institutions' willingness to take risk. The additional risk took the form of more risky loans, faster asset growth, and a greater reliance on low quality capital. This response to less supervision boosted banks' odds of failure. Lastly, we identify channels by which the reduction in supervisory capacity led to more costly failures relative to unaffected areas. None of these patterns are present in depository institutions subject to a different supervisor but otherwise similar to the banks in our sample.

Keywords: Bank Supervision, Risk Taking, S&L Crisis, Lending, Resolution Costs

JEL Classification: G01, G21, G28

Suggested Citation

Kandrac, John and Schlusche, Bernd, The Effect of Bank Supervision on Risk Taking: Evidence from a Natural Experiment (January 15, 2019). Available at SSRN: https://ssrn.com/abstract=2938039 or http://dx.doi.org/10.2139/ssrn.2938039

John Kandrac (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Bernd Schlusche

Board of Governors of the Federal Reserve System ( email )

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

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