Late last year, the NY Fed issued a terrific paper: “Supervising Failing Banks.” The authors explain that they’d set out to study “the role of banking supervision in anticipating, monitoring, and disciplining failing banks.” And they argue that, since the Financial Crisis, bank supervisors have become impressively adept in managing banks at imminent risk of failure. “Banking supervision is key in monitoring and imposing discipline on banks that have become troubled,” the authors contend.
In making that case, and with reference to confidential supervisory data covering all commercial bank examinations in the U.S. between 2000 and 2023, the authors point to four supervisory success factors: (1) supervisory ratings appear to accurately capture the increased risk of bank failures; (2) supervisors play a crucial role in requiring banks to recognize losses; (3) supervisors are more likely to make use of public enforcement actions when confronting failing banks; and (4) failing banks are typically closed through a supervisory decision and bank closures tend to occur in an orderly fashion.
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