Supervisory powers and bank risk taking

Abstract

We examine the effect of different types of bank supervisory powers in place before the crisis on bank risk-taking during the crisis. We employ data of more than 8000 banks from high-income OECD countries for the 2007–2011 period and impaired loans to gross loans ratio as proxy for bank risk-taking. Our Hausman–Taylor estimates indicate that the powers of bank supervisors to shake up the organizational structure of banks are more effective than powers to issue monetary penalties. Our results also suggest that supervisory powers do not affect risk-taking behavior of systemically important banks.

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