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The Real Effects of Bank Supervision: Evidence from On-Site Bank Inspections

Author

Listed:
  • Andrea Passalacqua

    (Board of Governors of the Federal Reserve System)

  • Paolo Angelini

    (Bank of Italy)

  • Francesca Lotti

    (Bank of Italy)

  • Giovanni Soggia

    (Bank of Italy)

Abstract

We show that bank supervision reduces distortions in credit markets and generates positive spillovers for the real economy. Exploiting the quasi-random selection of inspected banks in Italy, we show that financial intermediaries are more likely to reclassify loans as non-performing after an audit. Moreover, they change their lending policies as the composition of new lending shifts toward more productive firms. As a result, productive firms invest more in labor and capital, while underperforming firms are more likely to exit the market. Taken together, our results show that bank supervision is an important complement to regulation in improving credit allocation.

Suggested Citation

  • Andrea Passalacqua & Paolo Angelini & Francesca Lotti & Giovanni Soggia, 2021. "The Real Effects of Bank Supervision: Evidence from On-Site Bank Inspections," Temi di discussione (Economic working papers) 1349, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1349_21
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2021/2021-1349/en_tema_1349.pdf
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    Citations

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    Cited by:

    1. Thomas M. Eisenbach & David O. Lucca & Robert M. Townsend, 2022. "Resource Allocation in Bank Supervision: Trade‐Offs and Outcomes," Journal of Finance, American Finance Association, vol. 77(3), pages 1685-1736, June.
    2. Ricci, Lorenzo & Soggia, Giovanni & Trimarchi, Lorenzo, 2023. "The impact of bank lending standards on credit to firms," Journal of Banking & Finance, Elsevier, vol. 152(C).
    3. Donato Ceci & Andrea Silvestrini, 2023. "Nowcasting the state of the Italian economy: The role of financial markets," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 42(7), pages 1569-1593, November.
    4. Faria-e-Castro, Miguel & Paul, Pascal & Sánchez, Juan M., 2024. "Evergreening," Journal of Financial Economics, Elsevier, vol. 153(C).
      • Miguel Faria-e-Castro & Pascal Paul & Juan M. Sanchez, 2021. "Evergreening," Working Papers 2021-012, Federal Reserve Bank of St. Louis, revised Aug 2023.
      • Miguel Faria-e-Castro & Pascal Paul & Juan M. Sanchez, 2022. "Evergreening," Working Paper Series 2022-14, Federal Reserve Bank of San Francisco.
    5. Shen, Yu & Ren, Meixu & Zhao, Jingmei, 2023. "Bank competition and zombie company: Empirical evidence from China," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 297-318.
    6. Granja, João & Leuz, Christian, 2024. "The death of a regulator: Strict supervision, bank lending, and business activity," Journal of Financial Economics, Elsevier, vol. 158(C).

    More about this item

    Keywords

    bank supervision; inspections; credit allocation; real effects.;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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