Resource Allocation in Bank Supervision: Trade-offs and Outcomes

74 Pages Posted: 21 Mar 2016 Last revised: 17 May 2021

See all articles by Thomas M. Eisenbach

Thomas M. Eisenbach

Federal Reserve Banks - Federal Reserve Bank of New York

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2021

Abstract

We estimate a structural model of resource allocation on work hours of Federal Reserve bank supervisors to disentangle how supervisory technology, preferences, and resource constraints impact bank outcomes. We find a significant effect of supervision on bank risk and large technological scale economies with respect to bank size. Consistent with macro-prudential objectives, revealed supervisory preferences disproportionately weight larger banks, especially post-2008 when a resource reallocation to larger banks increased risk on average across all banks. Shadow cost estimates show tight resources around the financial crisis and counterfactuals indicate that binding constraints have large effects on the distribution of bank outcomes.

Keywords: bank supervision, bank regulation, monitoring, time use

JEL Classification: D82, G21, G28

Suggested Citation

Eisenbach, Thomas M. and Lucca, David O. and Townsend, Robert M., Resource Allocation in Bank Supervision: Trade-offs and Outcomes (April 1, 2021). FRB of NY Staff Report No. 769, Available at SSRN: https://ssrn.com/abstract=2750314

Thomas M. Eisenbach (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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HOME PAGE: http://teisenbach.github.io/

David O. Lucca

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

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Cambridge, MA 02139-4307
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