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December 2020 Revised December 2021
JEL classification: G20, G21, G28
Authors: Beverly Hirtle and Anna Kovner
We provide a critical review of the empirical and theoretical literature on bank supervision. The review focuses on microprudential supervision: the supervision of individual banking institutions aimed at assessing the financial and operational health of those firms. Theory suggests that supervision is required both to ensure compliance with regulation but also to allow for the use of soft information in mitigating externalities of bank failure. Empirically, more intensive supervision results in reduced risk-taking, but there is less consensus on whether the risk-reducing impact of supervision comes at the cost of reduced credit supply. Theoretical costs and benefits of supervisory disclosure have been outlined, and this disclosure is informative to investors. However, it is difficult to identify the impact of disclosure distinct from supervisory and regulatory changes.
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Anna Kovner
The author declares that she has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
