Local Bank Supervision

Abstract

We examine a policy reform that moved supervision for a subset of bank branches in China from the national to the prefecture level. Following the reform, these branches were 57 to 80% more likely to receive an enforcement action. The tighter local supervision results in more conservative lending by banks, reducing in turn aggregate loan supply in prefectures with more branches affected by the reform. We provide evidence for information gains under local supervision, outweighing distortions due to biases of local supervisors. Moreover, we find no evidence supporting other channels, such as increased supervisory capacity. Overall, our results emphasize the role of local information in the design of supervisory architectures.

Keywords: bank supervision, supervisory architecture, decentralization, enforcement actions, lending, information collection, incentives

JEL Classification: G21, G28