The Impact of Supervision on Bank Performance

We introduce a novel instrument to identify exogenous variation in the intensity of supervision across U.S. bank holding companies based on the size rank of a bank within its Federal Reserve district. We demonstrate that supervisors record more hours at the largest banks in a district, even after controlling for size and other characteristics. Using a matched sample approach, we find that these “top” banks are less volatile, hold less risky loan portfolios, and engage in more conservative reserving practices, but do not have lower earnings or slower asset growth. Given that these firms are subject to similar rules, our results support the notion that supervision has a distinct role as a complement to regulation.

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