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To supervise or to self-supervise: a machine learning based comparison on credit supervision

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  • José Américo Pereira Antunes

    (Central Bank of Brazil)

Abstract

This study investigates the need for credit supervision as conducted by on-site banking supervisors. It builds on a real bank on-site credit examination to compare the performance of a hypothetical self-supervision approach, in which banks themselves assess their loan portfolios without external intervention, with the on-site banking supervision approach of the Central Bank of Brazil. The experiment develops two machine learning classification models: the first model is based on good and bad ratings informed by banks, and the second model is based on past on-site credit portfolio examinations conducted by banking supervision. The findings show that the overall performance of the on-site supervision approach is consistently higher than the performance of the self-supervision approach, justifying the need for on-site credit portfolio examination as conducted by the Central Bank.

Suggested Citation

  • José Américo Pereira Antunes, 2021. "To supervise or to self-supervise: a machine learning based comparison on credit supervision," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-21, December.
    • Handle: RePEc:spr:fininn:v:7:y:2021:i:1:d:10.1186_s40854-021-00242-4
    DOI: 10.1186/s40854-021-00242-4
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    References listed on IDEAS

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    More about this item

    Keywords

    Bank supervision; Machine learning; Loan loss provisions; On-site credit supervision;
    All these keywords.

    JEL classification:

    • C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
    • 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
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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