Supervisory Enforcement Actions against Banks and Systemic Risk

56 Pages Posted: 10 Nov 2020 Last revised: 21 Jan 2021

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Jin Cai

University of South Carolina

Raluca A. Roman

Federal Reserve Bank of Philadelphia

John Sedunov

Villanova University - Department of Finance

Date Written: September 21, 2020

Abstract

Prudential bank supervision is designed to enhance financial stability, but we are unaware of 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. Theory is also ambiguous, leaving important unanswered research and policy questions regarding the effectiveness of these tools. 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 enhance 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 EAs against banks are more effective in systemic risk reduction than those against individual bank managers.

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 (September 21, 2020). 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 )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States
803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

Philadelphia, PA 19104-6367
United States

European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Jin Cai

University of South Carolina ( email )

701 Main Street
Columbia, SC 29208
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 a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
71
Abstract Views
508
rank
377,389
PlumX Metrics