The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity

78 Pages Posted: 16 Dec 2018 Last revised: 27 Jul 2020

See all articles by Joao Granja

Joao Granja

University of Chicago - Booth School of Business

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

Multiple version iconThere are 3 versions of this paper

Date Written: March 1, 2019

Abstract

An important question in banking is how strict supervision affects bank lending and in turn local business activity. Supervisors forcing banks to recognize losses could choke off lending and amplify local economic woes. But stricter supervision could also change how banks assess and manage loans. Estimating such effects is challenging. We exploit the extinction of the thrift regulator (OTS) to analyze economic links between strict supervision, bank lending and business activity. We first show that the OTS replacement indeed resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects. We show that former OTS banks increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks, those more affected by the new regime, and cannot be fully explained by a reallocation from mortgage to small business lending after the crisis. These findings suggest that stricter supervision operates not only through capital but can also correct deficiencies in bank management and lending practices, leading to more lending and a reallocation of loans.

Keywords: Bank regulation, Prudential oversight, Enforcement, Loan Losses, Credit Supply, Business entry and exit

JEL Classification: E44, E51, G21, G28, G32, G38, K22, K23, M41, M48

Suggested Citation

Granja, Joao and Leuz, Christian, The Death of a Regulator: Strict Supervision, Bank Lending and Business Activity (March 1, 2019). Center for Financial Studies Working Paper No. 610, Available at SSRN: https://ssrn.com/abstract=3289934 or http://dx.doi.org/10.2139/ssrn.3289934

Joao Granja

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Room 326
Chicago, IL 60637
United States

Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org

European Corporate Governance Institute (ECGI)

Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

University of Pennsylvania - Wharton Financial Institutions Center

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

CESifo Research Network

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
111
Abstract Views
1,161
rank
43,245
PlumX Metrics