The Impact of Supervision on Bank Performance
BEVERLY HIRTLE
Search for more papers by this authorANNA KOVNER
Search for more papers by this authorCorresponding Author
MATTHEW PLOSSER
Beverly Hirtle, Anna Kovner, and Matthew Plosser are with the Federal Reserve Bank of New York. The authors thank Maya Bidanda, Angela Deng, Brandon Zborowski, and Samantha Zeller for excellent research assistance. The authors thank Mark Carey, Stefan Lewellen, Mark Levonian, Antoinette Schoar, Philip Strahan, Vish Viswanathan, two anonymous referees, and seminar participants at the NY Fed, AFA Annual Meetings, Bank of France, NBER Summer Institute, and FDIC/JFSR Bank Research Conference for helpful comments. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or of the Federal Reserve System. The paper was subject to review when it was issued as a Staff Report by the Federal Reserve Bank of New York. A more detailed disclosure statement is available in the supplementary information section of the article.
Correspondence: Matthew Plosser, Federal Reserve Bank of New York, (212) 720-7486; e-mail: matthew.plosser@ny.frb.org.
Search for more papers by this authorBEVERLY HIRTLE
Search for more papers by this authorANNA KOVNER
Search for more papers by this authorCorresponding Author
MATTHEW PLOSSER
Beverly Hirtle, Anna Kovner, and Matthew Plosser are with the Federal Reserve Bank of New York. The authors thank Maya Bidanda, Angela Deng, Brandon Zborowski, and Samantha Zeller for excellent research assistance. The authors thank Mark Carey, Stefan Lewellen, Mark Levonian, Antoinette Schoar, Philip Strahan, Vish Viswanathan, two anonymous referees, and seminar participants at the NY Fed, AFA Annual Meetings, Bank of France, NBER Summer Institute, and FDIC/JFSR Bank Research Conference for helpful comments. The views in this paper are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of New York or of the Federal Reserve System. The paper was subject to review when it was issued as a Staff Report by the Federal Reserve Bank of New York. A more detailed disclosure statement is available in the supplementary information section of the article.
Correspondence: Matthew Plosser, Federal Reserve Bank of New York, (212) 720-7486; e-mail: matthew.plosser@ny.frb.org.
Search for more papers by this authorABSTRACT
We explore the impact of supervision on the riskiness, profitability, and growth of U.S. banks. Using data on supervisors' time use, we demonstrate that the top-ranked banks by size within a supervisory district receive more attention from supervisors, even after controlling for size, complexity, risk, and other characteristics. Using a matched sample approach, we find that these top-ranked banks that receive more supervisory attention hold less risky loan portfolios, are less volatile, and are less sensitive to industry downturns, but do not have lower growth or profitability. Our results underscore the distinct role of supervision in mitigating banking sector risk.
Supporting Information
| Filename | Description |
|---|---|
| jofi12964-sup-0003-DisclosureStatement.pdf749.2 KB |
Disclosure Statement. |
| jofi12964-sup-0001-OnlineAppendix.pdf1.1 MB |
Appendix S1: Internet Appendix. |
| jofi12964-sup-0002-ReplicationCode.zip144.2 MB |
Replication code. |
Please note: The publisher is not responsible for the content or functionality of any supporting information supplied by the authors. Any queries (other than missing content) should be directed to the corresponding author for the article.
REFERENCES
- Agarwal, Sumit, David Lucca, Amit Seru, and Francesco Trebbi, 2014, Inconsistant regulators: Evidence from banking, Quarterly Journal of Economics 189, 889–938.
- Altman, Edward, 1968, Financial ratios, discriminant analysis and the prediction of corporate bankruptcy, Journal of Finance 23, 589–609.
- Barth, James R., Chen Lin, Yue Ma, Jesús Seade, and Frank Song, 2013, Do bank regulation, supervision and monitoring enhance or impede bank efficiency?, Journal of Banking and Finance 37, 2879–2892.
- Bassett, William F., Seung Jung Lee, and Thomas Popeck Spiller, 2015, Estimating changes in supervisory standards and their economic effects, Journal of Banking & Finance 60, 21–43.
- Bassett, William F., and W. Blake Marsh, 2017, Assessing targeted macroprudential financial regulation: The case of the 2006 commercial real estate guidance for banks, Journal of Financial Stability 30, 209–228.
- Berger, Allen N., and Sally M. Davies, 1998, The information content of bank examinations, Journal of Financial Services Research 14, 117–144.
- Berger, Allen N., Sally M. Davies, and Mark J. Flannery, 2000, Comparing market and supervisory assessments of bank performance: Who knows what when?, Journal of Money, Credit and Banking 32, 641–667.
- Board of Governors of the Federal Reserve System, 2017a, About the Federal Reserve System, https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm.
- Board of Governors of the Federal Reserve System, 2017b, Annual Report 2016, https://www.federalreserve.gov/publications/files/2016-annual-report.pdf.
- Board of Governors of the Federal Reserve System, 2017c, Supervision & regulation, https://www.federalreserve.gov/supervisionreg.htm.
- Bolton, Patrick, and Mathias Dewatripont, 1994, The firm as a communication network, Quarterly Journal of Economics 109, 809–839.
- Boyd, John H., Stanley L. Graham, and R. Shawn Hewitt, 1993, Bank holding company mergers with nonbank financial firms effects on the risk of failure, Journal of Banking & Finance 17, 43–63.
- Bridges, Jonathan, David Gregory, Mette Nielsen, Silvia Pezzini, Amar Radia, and Marco Spaltro, 2014, The impact of capital requirements on bank lending, Bank of England working paper.
- Cargill, Thomas F., 1989, CAMEL ratings and the CD market, Journal of Financial Services Research 3, 347–358.
- Cetorelli, Nicola, and Samuel Stern, 2015, Same name, new businesses: Evolution in the bank holding company, New York Federal Reserve Liberty Street Economics Blog. https://libertystreeteconomics.newyorkfed.org/2015/09/same-name-new-businesses-evolution-in-the-bank-holding-company.html.
- Chaly, Stephanie, James Hennessey, Lev Menand, Kevin Stiroh, and Joseph Tracy, 2017, Misconduct risk, culture, and supervision, Federal Reserve Bank of New York white paper. https://www.newyorkfed.org/medialibrary/media/governance-and-culture-reform/2017-whitepaper.pdf.
- Cole, Rebel A., and Jeffery W. Gunther, 1995, A CAMEL rating's shelf life, Working paper.
- Delis, Manthos D., and Panagiotis K. Staikouras, 2011, Supervisory effectiveness and bank risk, Review of Finance 15, 511–543.
- Demsetz, Rebecca S., Marc R. Saidenberg, and Philip E. Strahan, 1996, Banks with something to lose: The disciplinary role of franchise value, Economic Policy Review 2, 1–14.
- Eisenbach, Thomas, Andrew Haughwout, Beverly Hirtle, Anna Kovner, David Lucca, and Matthew Plosser, 2017, Supervising large, complex financial firms: What do supervisors do?, Economic Policy Review 23, 57–77.
- Eisenbach, Thomas, David Lucca, and Robert Townsend, 2016, The economics of bank supervision, Staff report, Federal Reserve Bank of New York.
- Fama, Eugene F., and Kenneth R. French, 1993, The cross-section of expected stock returns, Journal of Finance 47, 427–465.
- Deposit Insurance Corporation Federal (FDIC), 1997, History of the Eighties: Lessons for the Future (Washington, DC: FDIC).
- Gabaix, Xavier, and Augustin Landier, 2008, Why has CEO pay increased so much?, Quarterly Journal of Economics 123, 49–100.
- Garicano, Luis, 2000, Hierarchies and the organization of knowledge in production, Journal of Political Economy 108, 874–904.
- Geanakoplos, John, and Paul Milgrom, 1991, A theory of hierarchies based on limited managerial attention, Journal of the Japanese and International Economies 5, 205–225.
- Ghizoni, Sandra Kollen, 2013, Reserve bank organization committee announces selection of reserve bank cities and district boundaries, The Federal Reserve Bank of Richmond website https://www.federalreservehistory.org/essays/reserve_bank_organization_committee.
- Goldsmith-Pinkham, Paul, Beverly Hirtle, and David Lucca, 2016, Parsing the content of bank supervision, Staff report, Federal Reserve Bank of New York.
- Gopalan, Yadav, Ankit Kalda, and Asaf Manela, 2017, Hub-and-spoke regulation and bank leverage, Working paper, Washington University in St. Louis.
- Hagendorff, Jens, Ivan Lim, and Seth Armitage, 2017, Does bank supervision matter? Evidence from regulatory office closures, Working paper, The University of Edinburgh.
- Hannan, Timothy H., and Gerald A. Hanweck, 1988, Bank insolvency risk and the market for large certificates of deposit, Journal of Money, Credit and Banking 20, 203–211.
- Hirtle, Beverly J., and Jose A. Lopez, 1999, Supervisory information and the frequency of bank examinations, Federal Reserve Bank of New York Economic Policy Review 5, 1–19.
- James, Christopher M., and Peggy Wier, 1987, Returns to acquirers and competition in the acquisition market: The case of banking, Journal of Political Economy 95, 355–370.
- Jayaratne, Jith, and Philip E. Strahan, 1996, The finance-growth nexus: Evidence from bank branch deregulation, Quarterly Journal of Economics 111, 639–670.
- Kiser, Elizabeth, Robin A Prager, and Jason Scott, 2012, Supervisor ratings and the contraction of bank lending to small businesses, FEDS working paper, Federal Reserve Board.
- Kovner, Anna, James Vickery, and Lily Zhou, 2014, Do big banks have lower operating costs?, Federal Reserve Bank of New York Economic Policy Review 20, 1–27.
- Krainer, John, and Jose A. Lopez, 2009, Do supervisory rating standards change over time?, Economic Review – Federal Reserve Bank of San Francisco 13–24.
- Lam, James, 1999, Enterprise-wide risk management: Staying ahead of the convergence curve, Journal of Lending and Credit Risk Management 81, 16–19.
- Miller, George, 1956, The magical number seven, plus or minus two: Some limits on our capacity for processing information, Psychological Review 63, 81–97.
- Mishkin, Fred S., 2001, Prudential Supervision: What Works and What Doesn't (Chicago: University of Chicago Press).
10.7208/chicago/9780226531939.001.0001 Google Scholar
- Morgan, Donald P., Rime Bertrand, and Philip E. Strahan, 2004, Bank integration and state business cycles, Quarterly Journal of Economics 119, 1555–1584.
- Moyer, S., 1990, Capital adequacy ratio regulations and accounting choices in commercial banks, Journal of Accounting and Economics 13, 123–154.
- Peek, Joseph, and Eric Rosengren, 1995, Bank regulation and the credit crunch, Journal of Banking and Finance 19, 679–692.
- Radner, Roy, 1993, The organization of decentralized information processing, Econometrica 61, 1109–1146.
- Rezende, Marcelo, 2016, The effects of bank charter switching on supervisory ratings, FEDS working paper, Federal Reserve Board.
- Rezende, Marcelo, and Jason J. Wu, 2014, The effects of supervision on bank performance: Evidence from discontinuous examination frequencies, Midwest Finance Association 2013 Annual Meeting Paper.
- Rosenbaum, Paul R., and Donald B. Rubin, 1983, The central role of the propensity score in observational studies for causal effects, Biometrika 70, 41–55.
- Sloan Swindle, C., 1995, Using camel ratings to evaluate regulator effectiveness at commercial banks, Journal of Financial Services Research 9, 123–141.
- Tarullo, Daniel K., 2016, Next steps in the evolution of stress testing, Remarks at the Yale University School of Management Leaders Forum, New Haven, CT.
