Working Paper: NBER ID: w24168
Authors: Joo Granja; Christian Leuz
Abstract: We exploit the extinction of the thrift supervisor (OTS) to analyze the effects of supervision on bank lending and bank management. We first show that the OTS replacement resulted in stricter supervision of former OTS banks. Next, we analyze the ensuing lending effects and show that former OTS banks on average increase small business lending by roughly 10 percent. This increase is concentrated in well-capitalized banks and especially in banks that changed management practices following the supervisory transition. These findings suggest that stricter supervision operates not only through the enforcement of loss recognition and capital adequacy, but can also act as a catalyst for operational changes that correct deficiencies in bank management and lending practices, which in turn increase lending.
Keywords: bank supervision; lending; business activity; OTS extinction; Dodd-Frank Act
JEL Codes: E44; E51; G21; G28; G32; G38; K22; K23; L51; M41; M48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Stricter supervision (C92) | Increased small business lending (G21) |
| Extinction of OTS (L29) | Stricter supervision (C92) |
| Stricter supervision (C92) | Enhanced lending capabilities (G21) |
| Increased small business lending (G21) | No higher delinquency rates (K35) |