Does Bank Supervision Impact Bank Loan Growth?

Abstract

We estimate the impact on individual bank loan growth caused by supervisory restrictions associated with a poor bank examination rating. We use a novel approach to control for bank loan demand variation and estimate a fixed-effect model using an unbalanced panel with over 443,000 bank-quarter observations from the period 1994-2011. Our estimates show that supervisory restrictions have a large negative impact on bank loan growth after controlling for the impact of monetary policy, bank capital and liquidity conditions and any voluntary reduction in lending triggered by weak legacy loan portfolio performance or other bank losses.