Sergio Correia, Stephan Luck, and Emil Verner

In this post, we discuss insights from a recent staff report on the role of banking supervision in identifying and disciplining failing banks. We show that bank failures typically result from supervisory closure decisions based on hard information about book equity. Yet hard information is itself partly produced by supervision, as our evidence suggests that supervisors require troubled banks to recognize potential losses. We argue that supervision faces a trade-off: Stricter supervision can reduce the costs of resolving failing banks, but it can also lead to tighter regulatory capital constraints and hold back credit supply.