The Effect of Bank Supervision and Examination on Risk Taking: Evidence from a Natural Experiment

The Effect of Bank Supervision and Examination on Risk Taking: Evidence from a Natural Experiment

We exploit an exogenous reduction in bank supervision to demonstrate a causal effect of supervisory resources on financial institutions' willingness to take risk. The additional risk took the form of more risky loans, faster asset growth, and a greater reliance on low quality capital. This response to less supervision boosted banks' odds of failure.

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