Bank Supervision and Managerial Control Systems: The Case of Minority Lending

55 Pages Posted: 9 Feb 2023

See all articles by Byeongchan An

Byeongchan An

University of Utah, David Eccles School of Business, Students

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Anya Kleymenova

Board of Governors of the Federal Reserve System

Rimmy E. Tomy

University of Chicago

Multiple version iconThere are 3 versions of this paper

Date Written: February 8, 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

An, Byeongchan and Bushman, Robert M. and Kleymenova, Anya V. and Tomy, Rimmy, Bank Supervision and Managerial Control Systems: The Case of Minority Lending (February 8, 2023). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2023-16, Available at SSRN: https://ssrn.com/abstract=4351836 or http://dx.doi.org/10.2139/ssrn.4351836

Byeongchan An

University of Utah, David Eccles School of Business, Students ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Anya V. Kleymenova

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2662 (Phone)

Rimmy Tomy (Contact Author)

University of Chicago ( email )

Booth School of Business
5807 S Woodlawn Ave
Chicago, IL 60637
United States

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