Working Paper: NBER ID: w17736
Authors: Sumit Agarwal; David Lucca; Amit Seru; Francesco Trebbi
Abstract: US state chartered commercial banks are supervised alternately by state and federal regulators. Each regulator supervises a given bank for a fixed time period according to a predetermined rotation schedule. We use unique data to examine differences between federal and state regulators for these banks. Federal regulators are significantly less lenient, downgrading supervisory ratings about twice as frequently as state supervisors. Under federal regulators, banks report higher nonperforming loans, more delinquent loans, higher regulatory capital ratios, and lower ROA. There is a higher frequency of bank failures and problem-bank rates in states with more lenient supervision relative to the federal benchmark. Some states are more lenient than others. Regulatory capture by industry constituents and supervisory staff characteristics can explain some of these differences. These findings suggest that inconsistent oversight can hamper the effectiveness of regulation by delaying corrective actions and by inducing costly variability in operations of regulated entities.
Keywords: regulation; banking; supervision; CAMELS ratings
JEL Codes: G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal regulators (G18) | Downgrade supervisory ratings (G28) |
| Federal regulators (G18) | Higher nonperforming loans (G21) |
| Federal regulators (G18) | More delinquent loans (G51) |
| Federal regulators (G18) | Higher regulatory capital ratios (G28) |
| Federal regulators (G18) | Lower return on assets (ROA) (G32) |
| Federal supervision (I28) | Corrective actions by banks (G28) |
| Higher scrutiny from federal regulators (G28) | Adjustments in bank operations (G21) |