Mitigating the risks of deregulation: The role of supervisory attention

Abstract

We study how regulation and supervision interact to affect bank risk. Exploiting the 2018-2019 U.S. bank deregulation, we show that mid-sized banks subject to relaxed liquidity requirements experienced a deterioration in liquidity. At the same time, using confidential data from the Federal Reserve on supervisory hours, we document that these banks were subject to more intense supervision, with in an increase in examination activity. Our evidence suggests that the increase in supervisory intensity mitigates the liquidity risk deterioration. These effects are stronger in districts where supervisors oversee fewer banks and have longer tenure. These results underscore the complementary roles of regulation and supervision, and suggest that preserving supervisory capacity can enhance the resilience of the banking system.