Working Paper: CEPR ID: DP18571
Authors: Di Gong; Thomas Lambert; Wolf Wagner
Abstract: This paper provides novel evidence for informational advantages of local bank supervision, outweighing biases due to the pursuit of local interests. For identification, we exploit a policy reform in China that moved supervision for a subset of bank branches from the national to the city level. Following the reform, these branches were 50 to 74% more likely to face an enforcement action. The tighter local supervision results in more conservative lending by banks, reducing in turn aggregate loan supply in cities with more local supervision. Our findings inform the debate on the design of an optimal supervisory architecture.
Keywords: Lending; Bank Supervision; Supervisory Architecture; Decentralization; Enforcement Actions; Information Collection; Incentives
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decentralization reform (H77) | likelihood of receiving enforcement actions (G18) |
| Decentralization reform (H77) | number of penalties imposed on local banks (G21) |
| tighter local supervision (H76) | conservative lending behaviors from local banks (G21) |
| tighter local supervision (H76) | lower credit growth in cities with a higher share of local banks (G21) |
| informational advantages of local supervision (R53) | tighter local supervision (H76) |
| local political interests (H73) | biased enforcement decisions (K42) |