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FIIE-5: Bank Supervision
1Goethe University Frankfurt, Germany; 2London Business School
We show that differences exist between banking supervisors and these differences can have potential consequences for financial stability and real economic outcomes. We exploit the shift in supervisory responsibility of banks larger than e30 Billion in assets from National Competent Authorities (NCA) to the Single Supervisory Mechanism (SSM) under the ECB. Supervision of banks smaller than e30 billion in assets remained with the NCAs. SSM banks report higher Risk Weights(RW), higher probability of default and lower collateral ratio for the same firm at the same time before and after compared to non-SSM banks. As a consequence of higher RWs, SSM banks reduce their lending and security holdings. This reduction is more pronounced in riskier assets which leads to a higher proportion of risky assets being held by smaller non-SSM banks. Matching the credit register with firm level balance sheet data, we further show that firms receiving loans only from SSM banks exhibit reduced employment, sales and investment compared to other firms.
Regulatory Scrutiny and Bank Credit Supply
Federal Reserve Board, United States of America
We study how regulatory scrutiny affects bank credit supply. We exploit the quasi-random assignment of federal examiners to syndicated loan reviews whereby adverse reviews increase scrutiny through additional monitoring and reduced bank capital. Even absent changes in risk, banks still decrease their exposures to scrutinized loans. While banks partially offset these reductions through other lending to affected borrowers, the borrower’s syndicated financing and leverage still fall by 16% and 18% respectively. We find no evidence that nonregulated institutions offset these reductions. Our results suggest that banks pass on some of the costs of regulatory scrutiny to borrowers through decreased lending.
“Inspect what you expect to get respect” Can bank supervisors kill zombie lending?
1Bank of Portugal; 2Católica Lisbon School of Business and Economics.; 3KU Leuven; 4University of Zurich; 5SFI; 6CEPR
A bank in poor financial shape may have incentives to continue lending to a “zombie” firm in order to avoid or delay the recognition of credit losses. In spite of growing regulatory pressure, there is evidence that “zombie lending” remains widespread in developed countries. We exploit information on a unique series of special on-site inspections of bank credit portfolios in Portugal to investigate how such inspections affect banks’ future lending decisions. We find that following an inspection a bank becomes 3 to 6 percentage points less likely to refinance a firm with negative equity. Our findings suggest that banks structurally change their lending decisions following inspections.
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Conference: EFA 2019
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