The Effects of Supervision on Bank Performance: Evidence from Discontinuous Examination Frequencies

Abstract

This paper estimates causal effects of supervision on bank performance using discontinuities in the minimum frequency of examinations required by regulation. This frequency is discontinuous at a value of bank assets that varied over time, allowing us to break the endogeneity between supervision and performance and to separate the effects of examinations from confounding effects of other banking policies that are triggered by asset thresholds too. We find that more frequent examinations increase profitability by decreasing loan losses and delinquencies. This suggests that supervisors limit the risks that banks are exposed to and, consequently, limit banks’ losses on risky assets.