Bank Supervision

Abstract

We provide a critical review of the empirical and theoretical literature on bank supervision. This review focuses on microprudential supervision: the supervision of individual banking institutions aimed at assessing the financial and operational health of those firms. Theory suggests that supervision is required not only to ensure compliance with regulation but also to allow for the use of soft information in mitigating externalities of bank failure. Empirically, more intensive supervision results in reduced risk-taking, but less consensus has been found on whether the risk-reducing impact of supervision comes at the cost of reduced credit supply. Theoretical costs and benefits of supervisory disclosure have been outlined, and this disclosure is informative to investors; however, it is difficult to identify the impact of disclosure distinct from supervisory and regulatory changes.