In a recent post on the Financial Times’ Alphaville blog, Daniel Davies, author of The Unaccountability Machine, examines new European Central Bank (ECB) research on the relative effectiveness of two bank supervision methods: targeted reviews and on-site inspections.
The supervisory methods differ substantially. A targeted review is a desk-based exercise whereby supervisors review a range of banks, focusing on those that may present some cause for concern. In an on-site inspection, by contrast, a team visits a specific bank’s offices in person and examines its practices. As such, on-site inspections are both more labor-intensive and more intrusive.
Using confidential supervisory data from the period following the COVID pandemic, authors Jae Hyun Jo, Stefano Demartis, and Spyros Palligkinis studied commercial real estate lending practices across European banks. The researchers measured outcomes using the “coverage ratio,” the ratio of bad debt provisions to the CRE loan book, as a proxy for risk management conservatism, since banks with weaker risk functions tend to under-reserve against bad loans.
After controlling for differences in bank risk profiles and starting positions, the researchers found that on-site inspections produced long-term gains in coverage ratios, while targeted reviews delivered meaningful but temporary gains lasting up to a year. “On this basis, it seems that an on-site inspection has an immediate and permanent effect,” Davies writes.
He notes that targeted reviews remain valuable despite their weaker staying power, as they still have some positive effect while offering a more cost-effective way to monitor a wide range of banks. “But it does demonstrate that if you want to change behaviour, there’s nothing like the personal touch,” Davies concludes.
For more from Daniel Davies, read his Peer Perspectives article from the 2025 Compendium.
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