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Estimating changes in supervisory standards and their economic effects

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  • William F. Bassett
  • Seung Jung Lee
  • Thomas W. Spiller
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    Abstract

    The disappointingly slow recovery in the U.S. from the recent recession and financial crisis has once again focused attention on the relationship between financial frictions and economic growth. With bank loans having only recently started growing and still sluggish, some bankers and borrowers have suggested that unnecessarily tight supervisory policies have been a constraint on new lending that is hindering recovery. This paper explores one specific aspect of supervisory policy: whether the standards used to assign commercial bank CAMELS ratings have changed materially over time (1991-2011). We show that models incorporating time-varying parameters or economy-wide variables suggest that standards used in the assignment of CAMELS ratings in recent years generally have been in line with historical experience. Indeed, each of the models used in this analysis suggests that the variation in those standards has been relatively small in absolute terms over most of the sample period. However, we show that when this particular aspect of supervisory stringency becomes elevated, it has a noticeable dampening effect on lending activity in subsequent quarters.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-55.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedgfe:2012-55

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    References

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    1. Sumit Agarwal & David Lucca & Amit Seru & Francesco Trebbi, 2012. "Inconsistent Regulators: Evidence From Banking," NBER Working Papers 17736, National Bureau of Economic Research, Inc.
    2. Curry, Timothy J. & Fissel, Gary S. & Hanweck, Gerald A., 2008. "Is there cyclical bias in bank holding company risk ratings?," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1297-1309, July.
    3. António Afonso & Pedro Gomes & Philipp Rother, 2011. "Short‐ and long‐run determinants of sovereign debt credit ratings," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 16(1), pages 1-15, 01.
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    Cited by:
    1. William F. Bassett & Mary Beth Chosak & John C. Driscoll & Egon Zakrajsek, 2012. "Changes in bank lending standards and the macroeconomy," Finance and Economics Discussion Series 2012-24, Board of Governors of the Federal Reserve System (U.S.).

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