How Do Joint Supervisors Examine Financial Institutions? The Case of State Banks

Abstract

This paper studies what determines whether federal and state supervisors examine state banks independently or together. The results suggest that supervisors coordinate examinations in order to support states with lower budgets and capabilities and more banks to supervise. I find that states with larger budgets examine more banks independently, that they accommodate changes in the number of banks mostly through the number of examinations with a federal supervisor and that, when examining banks together, state banking departments that have earned quality accreditation are more likely to write conclusion reports separately from federal supervisors. The results also indicate that regulation impacts supervision by changing the characteristics of banks. Independent examinations decrease with branch deregulation, which is consistent with the facts that this reform consolidated banks within fewer independent firms and that state and federal supervisors are more likely to examine large and complex institutions together.JEL Classification: G21, G28.

Optimal Supervisory Architecture and Financial Integration in a Banking Union*

“…Also in the U.S. case, Rezende (2011) shows that joint examinations by State and Federal supervisors are more frequent for large and complex institutions, which corresponds well to the effect of opacity in the model. An alternative explanation developed by the author is that Federal supervisors support State supervisors with not enough staff to properly supervise a particular bank.…”

“…These phenomena would be the European equivalent of U.S. banks strategically choosing their supervisor, as studied in e.g. Rosen (2003) or more recently Rezende (2014).…”

Bank structure and failure during the financial crisis

“…. SeeRezende (2011) for a detailed study on the determinants as to whether federal and state supervisors examine state banks independently or together.…”

Multinational Banks and Supranational Supervision

“…Externalities lead independent national regulators to choose suboptimal regulatory standards, in the form of too low capital requirements (Dalen andOlsen (2003), Dell'Ariccia andMarquez (2006)), too lax intervention thresholds (Acharya (2003)), or too coarse information sharing (Holthausen and Rønde (2004)). Several papers provide empirical evidence of the divergence of objectives between bank supervisors, both in the U.S. (Agarwal et al (2014) and Rezende (2011)) and in the E.U. (Beck, Todorov, and Wagner (2013)).…”