Using a matched sample approach, we find that these top‐ranked banks that receive more supervisory attention hold less risky loan portfolios, are less volatile, and are less sensitive to industry downturns, but do not have lower growth or profitability.
The key empirical hurdle to identifying the impact of supervision is that larger and riskier firms receive more supervisory attention. To address this challenge, we exploit the structure of supervisory responsibilities within the Federal Reserve System, under which bank holding companies (BHCs or “banks”) are geographically assigned to 1 of 12 Federal Reserve districts. We hypothesize that within each district, the largest institutions receive more supervisory attention, ceteris paribus, than institutions that are not among the largest. We validate this hypothesis using proprietary Federal Reserve data by showing that examiners spend more time at the largest firms in a district, even when controlling for firm characteristics such as size, market share, complexity, and supervisory rating.
We match top‐ranked BHCs in each Federal Reserve district by size, deposit market share, organizational complexity, types of banking subsidiaries, diversity of lending activities, and other characteristics to non‐top‐ranked banks in other districts. Doing so allows us to construct a sample of banks that have varying ranks in their Federal Reserve districts but that are otherwise similar.