Supranational Banking Supervision, Credit Supply, and Risk‐Taking: European Evidence from Multi‐Country Credit Registers

Abstract

Using a novel data set of multi‐country credit registers and an institutional change from national to supranational supervision, we show that supranational banking supervision can increase credit supply while mitigating excessive risk‐taking. Supranational supervision increases credit supply only in financially stressed countries while reducing the credit supply to the riskiest (zombie) firms. These improved lending effects stem from weaker national institutions, differential national supervisory incentives, lower national supervisory abilities, and weaker national insolvency laws. Moreover, improved access to external finance from wholesale and bond markets as well as lower risk‐weighted assets allow supranationally supervised banks to expand the supply of credit. Overall, despite some supranational supervisory arbitrage, supranational supervision decreases firm‐level credit to the riskiest firms while increasing firm‐level credit availability in stressed countries without reducing it in nonstressed countries.