Supranational Supervision

Posted: 23 Nov 2022 Last revised: 27 Jul 2023

See all articles by Rainer F. H. Haselmann

Rainer F. H. Haselmann

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE

Shikhar Singla

London Business School - Department of Finance; Goethe University Frankfurt - Center for Advanced Studies - Foundations of Law & Finance (LawFin)

Vikrant Vig

London Business School

Date Written: July 20, 2022

Abstract

We exploit the establishment of a supranational supervisor in Europe (the Single Supervisory Mechanism) to learn how the organizational design of supervisory institutions impacts the enforcement of financial regulation. Banks under supranational supervision are required to increase regulatory capital for exposures to the same firm compared to banks under the local supervisor. Local supervisors provide preferential treatment to larger institutes. The central supervisor removes such biases, which results in an overall standardized behavior. While the central supervisor treats banks more equally, we document a loss in information in banks’ risk models associated with central supervision. The tighter supervision of larger banks results in a shift of particularly risky lending activities to smaller banks. We document lower sales and employment for firms receiving most of their funding from banks that receive a tighter supervisory treatment. Overall, the central supervisor treats banks more equally but has less information about them than the local supervisor.

Keywords: Financial Regulation, Financial Supervision, Banking Union

JEL Classification: G21, G28

Suggested Citation

Haselmann, Rainer F. H. and Singla, Shikhar and Vig, Vikrant, Supranational Supervision (July 20, 2022). LawFin Working Paper No. 50, Available at SSRN: https://ssrn.com/abstract=4272923 or http://dx.doi.org/10.2139/ssrn.4272923

Rainer F. H. Haselmann

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Mertonstrasse 17-25
Frankfurt am Main, D-60325
Germany

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Shikhar Singla (Contact Author)

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Goethe University Frankfurt - Center for Advanced Studies - Foundations of Law & Finance (LawFin) ( email )

Theodor-W.-Adorno-Platz 3
60629 Frankfurt am Main
Germany

Vikrant Vig

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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