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Banks' Strategic Responses to Supervisory Coverage: Evidence from a Natural Experiment

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  • IVAN T. IVANOV
  • BEN RANISH
  • JAMES WANG

Abstract

U.S. bank supervisors conduct frequent and comprehensive loan‐level exams of the syndicated loan market. These exams are costly as adverse exam loan ratings may increase supervisory scrutiny and reduce bank capital. Relying on an unexpected change in supervisory coverage in 1998, we estimate that the cost of bank credit for borrowers excluded from supervision decreases by approximately 18%. We show that large lenders use the coverage change to exclude deals from supervision, especially riskier deals. Strikingly, small lenders shift their lending to increase supervisory coverage, suggesting the potential importance of supervision in reducing information asymmetries within lending syndicates.

Suggested Citation

  • Ivan T. Ivanov & Ben Ranish & James Wang, 2023. "Banks' Strategic Responses to Supervisory Coverage: Evidence from a Natural Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(2-3), pages 503-530, March.
    • Handle: RePEc:wly:jmoncb:v:55:y:2023:i:2-3:p:503-530
    DOI: 10.1111/jmcb.12964
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    References listed on IDEAS

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