Bank Supervision and Managerial Control Systems: The Case of Minority Lending
Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC
Kenan Institute of Private Enterprise Research Paper No. 3825119
55 Pages Posted: 20 Apr 2021 Last revised: 10 Feb 2023
There are 2 versions of this paper
Social Externalities of Bank Enforcement Actions: The Case of Minority Lending
Bank Supervision and Managerial Control Systems: The Case of Minority Lending
Date Written: February 7, 2023
Abstract
This paper investigates how bank supervisors’ enforcement decisions and orders (EDOs) influence the allocation of mortgage lending across demographic groups underlying a banks’ borrower base. Specifically, we investigate how banks’ mortgage lending to minority borrowers relative to white borrowers changes following the resolution of severe EDOs. We hypothesize that improvements in management control systems imposed by EDOs serve as channels through which EDOs affect a bank’s borrower base generally, and minority lending specifically. We empirically examine how changes in loan policies and internal governance mechanisms specified in EDOs influence banks’ mortgage lending decisions. We find that relative to white borrowers, mortgage lending to minority borrowers significantly increases following the resolution of EDOs, where this positive effect increases with the strictness of bank supervisors and severity of the EDO. Consistent with management controls serving as channels for this change, there is a more pronounced effect on minority lending when an EDO mandates improvements in lending policies and stronger internal governance over lending decisions.
Keywords: Banking, Bank supervision, Discrimination, Enforcement actions, Internal controls, Internal audit, Loan policy, Mortgage lending
JEL Classification: G21, G28, G38
Suggested Citation: Suggested Citation