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Supervisory enforcement actions against banks and systemic risk

Author

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  • Berger, Allen N.
  • Cai, Jin
  • Roman, Raluca A.
  • Sedunov, John

Abstract

Bank prudential supervision is designed to enhance financial stability, but we are unaware of extant empirical research linking this supervision to financial system risk. In particular, there are no prior findings on how supervision enforcement actions (EAs) – major tools of supervisors – affect systemic risk. We empirically investigate relations between EAs and banks’ contributions to systemic risk. We find significantly smaller bank contributions to systemic risk after EAs than before them, suggesting that EAs are associated with enhanced financial stability. The data also suggest that the primary channel behind this relation is reduced leverage, but lower portfolio risk also plays a role. We also find that the magnitude of our findings is greater during financial crises than normal times, and that more severe EAs and EAs against banks are more effective in systemic risk reduction than that are those less severe and those against individual bank managers, respectively.

Suggested Citation

  • Berger, Allen N. & Cai, Jin & Roman, Raluca A. & Sedunov, John, 2022. "Supervisory enforcement actions against banks and systemic risk," Journal of Banking & Finance, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:jbfina:v:140:y:2022:i:c:s0378426621001813
    DOI: 10.1016/j.jbankfin.2021.106222
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    More about this item

    Keywords

    Enforcement actions; Banks; Systemic risk; Leverage risk; Financial crises;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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