Subjective Supervisory Assessment of Management Performance And Decision Making in Banking

We examine subjective supervisory assessments of performance in the banking industry. Results of empirical tests show that better assessments are: 1) positively associated with decisions made by supervisors to upgrade objective performance ratings; 2) negatively associated with decisions made by supervisors to downgrade objective performance ratings; and 3) positively associated with decisions made by bank holding company managers to allocate capital among subsidiary banks. These findings are consistent with a production of soft information in the examination process whose usefulness is validated in decisions about banks that are made both internally (by bankers) and externally (by supervisors).