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Beyond the Surface of Banking Supervision: Multi-Faceted Effects on Lenders and Borrowers

20th National Competition for Economic Research Grants (2021)

Applied Economics

Senior Researcher : Pedro Jesús Cuadros Solas

Research Centre or Institution : CUNEF Universidad

Abstract

The objective of the research project is to contribute to the research on th effects of banking supervision. Specifically, we aim to provide empirical evidence on the multifaceted consequences of different supervisory regimes at three different levels: bank-level (lenders), firm-level (borrowers) and sector-level (industrial organization). This is an important and particularly timely topic to address. Postpandemic economic growth in the euro area strongly depends on a well-functioning banking system.

Our identification strategy exploits the introduction of the Single Supervisory Mechanism (SSM) in the euro area and the discontinuity between banks that are assigned to different supervisory regimes. The euro area banking sector provides a unique setting for studying the consequences of centralized versus decentralized supervisory regimes on banks and on the real economy. Unlike other banking supervision architectures across the globe, under the Single Supervisory Mechanism (SSM) only the supervision of few significant banks is fully centralized at the European level. Other banks’ supervision is either joint (i.e., delegated to national authorities) or de facto decentralized (only for banks of small size). This discontinuity between banks in the euro area that are assigned to the central supervisor and banks that are assigned to national supervisors allows us to provide bank-, firm-, and loanlevel evidence of the causal effects of different supervisory regimes on a broad set of real economic outcomes.

This unique setting allows studying how the architecture of banking supervision affects: (i) lenders’ behavior in terms of credit allocation, funding and corporate governance; (ii) borrowers’ financing and investment policies; and (iii) the implications for competition and M&A activity in the banking sector.

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