Supervising Failing Banks
We examine the role of banking supervision in identifying and disciplining failing banks. We show that bank failures typically result from supervisory closure decisions based on hard information about book equity. Yet hard information is itself partly produced by supervision, as supervisors require troubled banks to recognize potential losses. To establish causality, we exploit exogenous variation in supervisory strictness during the Global Financial Crisis. Stricter supervision leads to more loss recognition, lower book equity, and a higher likelihood and speed of closure. It also reduces FDIC resolution costs at failure but can contract credit, consistent with a trade-off between supervisory strictness and forbearance.
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Copy CitationSergio A. Correia, Stephan Luck, and Emil Verner, "Supervising Failing Banks," NBER Working Paper 34343 (2025), https://doi.org/10.3386/w34343.Download Citation
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