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Bank Supervision, Support and Resolution Policies

Paper Session

Friday, Jan. 6, 2017 3:15 PM – 5:15 PM

Sheraton Grand Chicago, Chicago Ballroom VI
Hosted By: American Finance Association
  • Chair: Randall S. Kroszner, University of Chicago

Parsing the Content of Bank Supervision

Paul Goldsmith-Pinkham
,
Federal Reserve Bank of New York
Beverly Hirtle
,
Federal Reserve Bank of New York
David Lucca
,
Federal Reserve Bank of New York

Abstract

We measure bank supervision using the database of supervisory issues, known as matters requiring attention or immediate attention, raised by Federal Reserve examiners to banking organizations. The volume of supervisory issues increases with banks’ asset size, especially for the largest and most complex banks, and decreases with the quality of loan portfolio and profitability. Stressed banks are faster at resolving issues, but all else equal, resolving new issues takes longer the more issues a bank faces, which may suggest capacity constraints in addressing multiple supervisory issues. Using computational linguistic methods on the text of the issue description, we define five categorical issue topics. The subset related to capital levels and loan portfolio are the most consequential in terms of regulatory rating downgrades and are directly related with changes in banks’ balance sheet characteristics and profitability. Other issues appear to reflect soft information and are less correlated with bank observables. By categorizing analysts’ questions at banks’ quarterly earnings calls with the same linguistic approach, we find that market monitors raise issues similar to those of supervisors’ when these are related to hard information (loan quality, capital) or public supervisory assessment programs.

Does a Larger Menu Increase Appetite? Collateral Eligibility and Bank Risk-Taking

Sjoerd van Bekkum
,
Erasmus University Rotterdam
Marc Gabarro
,
Erasmus University Rotterdam
Rustom M. Irani
,
University of Illinois-Urbana-Champaign

Abstract

We examine a change in the European Central Bank’s collateral framework, which significantly lowered the rating requirement for eligible residential mortgage-backed securities (RMBS), and its impact on bank lending and risk-taking in the Netherlands. Banks most affected by the policy increase loan supply and lower interest rates on new mortgage originations. These lower interest rate loans serve as collateral for newly issued RMBS with lower-rated tranches and subsequently experience worse repayment performance. The performance deterioration is pronounced among loans with state guarantees, which suggests looser collateral requirements may lead to undesired credit risk transfer to the sovereign.

Bank Resolution and the Structure of Global Banks

Patrick Bolton
,
Columbia University
Martin Oehmke
,
Columbia University

Abstract

We study the efficient resolution of global banks by national regulators. Single-point-of-entry (SPOE) resolution, where loss-absorbing capacity is shared across jurisdictions, is efficient in principle, but may not be implementable. First, when expected transfers across jurisdictions are too asymmetric, national regulators fail to set up an efficient SPOE resolution regime ex ante. Second, when required ex-post transfers across jurisdictions are too large, national regulators ring-fence local banking assets instead of cooperating in a planned SPOE resolution. In this case, multiple-point-of-entry (MPOE) resolution, where loss-absorbing capacity is pre-assigned to jurisdictions, is more efficient. Our analysis highlights a complementarity between bank resolution and the structure of global banks: the more decentralized a global bank's operations, the greater the relative efficiency of MPOE resolution.
Discussant(s)
Amit Seru
,
University of Chicago
Philipp Schnabl
,
New York University
Randall S. Kroszner
,
University of Chicago
JEL Classifications
  • G2 - Financial Institutions and Services