On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory and supervisory philosophy

Delis, Manthos D and Staikouras, Panagiotis (2009): On-site audits, sanctions, and bank risk-taking: An empirical overture towards a novel regulatory and supervisory philosophy.

Abstract

This paper investigates the role of banking supervision, measured in terms of enforcement outputs (i.e., on-site audits and sanctions) in containing bank risk-taking. Our results on the direct banking supervision–risk-taking correlation show an inverted U-shaped relationship between on-site audits and bank risk, while the nexus between enforcement actions and risk appears linear and negative. With respect to the combined effect of efficient supervision and banking regulation (in the form of capital and transparency requirements) we find that effective supervision and disclosure prerequisites are important and complementary mechanisms in reducing bank fragility, by contrast to capital requirements which are proven rather futile in controlling bank risk, even when supplemented with a higher volume of on-site audits and enforcement actions.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank risk; Regulation; Supervision; Enforcement; Sanctions; Audits
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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