Supervisory Enforcement Actions against Banks and Systemic Risk

57 Pages Posted: 10 Nov 2020 Last revised: 6 Jul 2021

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business

Jin Cai

Sacred Heart University

Raluca A. Roman

Federal Reserve Bank of Philadelphia

John Sedunov

Villanova University - Department of Finance

Date Written: May 23, 2021

Abstract

Bank prudential supervision is designed to enhance financial stability, but we are unaware of extant empirical research linking this supervision to financial system risk. In particular, there are no prior findings on how supervisory enforcement actions (EAs) – major tools of supervisors – affect systemic risk. We empirically investigate relations between EAs and banks’ contributions to systemic risk. We find significantly smaller bank contributions to systemic risk after EAs than before them, suggesting that EAs are associated with enhanced financial stability. The data also suggest that the primary channel behind this relation is reduced leverage, but lower portfolio risk also plays a role. We also find that the magnitude of our findings is greater during financial crises than normal times, and that more severe EAs and EAs against banks are more effective in systemic risk reduction than those less severe and those against individual bank managers, respectively.

Keywords: Enforcement actions, banks, systemic risk, leverage risk, financial crises

JEL Classification: G18, G21, G28

Suggested Citation

Berger, Allen N. and Cai, Jin and Roman, Raluca A. and Sedunov, John, Supervisory Enforcement Actions against Banks and Systemic Risk (May 23, 2021). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3696428 or http://dx.doi.org/10.2139/ssrn.3696428

Allen N. Berger

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene St.
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Jin Cai

Sacred Heart University ( email )

5151 Park Avenue
Fairfield, CT 06825
United States

Raluca A. Roman (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

John Sedunov

Villanova University - Department of Finance ( email )

800 Lancaster Ave.
Villanova, PA 19085
United States
610-519-4374 (Phone)

HOME PAGE: http://homepage.villanova.edu/john.sedunov/

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
230
Abstract Views
1,387
Rank
241,240
PlumX Metrics