The Effects of Regulatory Office Closures on Bank Behavior

Lim, Ivan; Hagendorff, Jens; Armitage, Seth

Abstract

We investigate if the decentralized structure of regulatory office networks influences supervisory outcomes and bank behavior. Following the closure of an office, banks previously supervised by that office increase their lending and risk-taking. As a result, affected banks have larger loan losses and higher failure rates during the 2008–09 financial crisis. Analysis of the channels suggests that proximate supervisors enforce timelier provisioning practices, restrict large cash payouts, and provide advice that increases a bank's risk-adjusted returns. Overall, our findings imply that geographical proximity reduces informational frictions in supervisory monitoring and leads to more stable banks.

Citation

Lim, I., Hagendorff, J., & Armitage, S. (2024). The Effects of Regulatory Office Closures on Bank Behavior. Journal of Money, Credit and Banking, https://doi.org/10.1111/jmcb.13126

• Journal Article Type: Article
• Acceptance Date: Sep 5, 2023
• Online Publication Date: Feb 11, 2024
• Publication Date: Feb 11, 2024
• Deposit Date: Dec 18, 2023
• Publicly Available Date: Mar 20, 2024
• Journal: Journal of Money, Credit and Banking
• Print ISSN: 0022-2879
• Electronic ISSN: 1538-4616
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• DOI: https://doi.org/10.1111/jmcb.13126
• Public URL: https://durham-repository.worktribe.com/output/2047136