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Supervising Failing Banks

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Abstract

This paper studies the role of banking supervision in anticipating, monitoring, and disciplining failing banks. We document that supervisors anticipate most bank failures with a high degree of accuracy. Supervisors play an important role in requiring troubled banks to recognize losses, taking enforcement actions, and ultimately closing failing banks. To establish causality, we exploit exogenous variation in supervisory strictness during the Global Financial Crisis. Stricter supervision leads to more loss recognition, reduced dividend payouts, and an increase in the likelihood and speed of closure. Increased strictness entails a trade-off between a lower resolution cost to the FDIC and reduced credit.

Suggested Citation

  • Sergio A. Correia & Stephan Luck & Emil Verner, 2025. "Supervising Failing Banks," Working Paper 25-10, Federal Reserve Bank of Richmond.
    • Handle: RePEc:fip:fedrwp:102048
    DOI: 10.21144/wp25-10
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    File URL: https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/working_papers/2025/wp25-10.pdf
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    Keywords

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    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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