The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity

104 Pages Posted: 28 Dec 2017 Last revised: 24 May 2024

See all articles by Joao Granja

Joao Granja

University of Chicago - Booth School of Business

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Leibniz Institute SAFE; CESifo Research Network; Center for Financial Studies (CFS)

Multiple version iconThere are 3 versions of this paper

Date Written: January 30, 2024

Abstract

We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of supervision on bank lending and bank management. We first show that the OTS replacement resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially in banks that changed management practices following the supervisory transition. These findings suggest that stricter supervision operates not only through the enforcement of loss recognition and capital adequacy, but can also act as a catalyst for operational changes that correct deficiencies in bank management and lending practices, which in turn increase lending.

Keywords: Bank regulation, Enforcement, Loan losses, Aggregate outcomes, Prudential oversight, Business lending, Entry and exit

JEL Classification: E44, E51, G21, G28, G31, G38, K22, K23, L51, M41, M48

Suggested Citation

Granja, Joao and Leuz, Christian, The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity (January 30, 2024). European Corporate Governance Institute (ECGI) - Law Working Paper No. 447/2019, LawFin Working Paper No. 4, Available at SSRN: https://ssrn.com/abstract=3092284 or http://dx.doi.org/10.2139/ssrn.3092284

Joao Granja

University of Chicago - Booth School of Business ( email )

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Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

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HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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European Corporate Governance Institute (ECGI)

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Belgium

HOME PAGE: http://www.ecgi.org

Leibniz Institute SAFE ( email )

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CESifo Research Network

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Center for Financial Studies (CFS) ( email )

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