To better understand how regulatory policy might directly influence bank lending, this article examines the ways that bank supervisors intervene when a bank's financial situation deteriorates. If a bank's problems are serious, regulators will impose a formal action, a legally enforceable agreement requiring a bank to improve its performance. Among the conditions included in formal regulatory actions, capital requirements have played a key role in altering bank lending behavior. The study documents that the correlation between bank capital and loan shrinkage found in earlier studies has a regulatory link, through the requirements imposed in formal actions."> To better understand how regulatory policy might directly influence bank lending, this article examines the ways that bank supervisors intervene when a bank's financial situation deteriorates. If a bank's problems are serious, regulators will impose a formal action, a legally enforceable agreement requiring a bank to improve its performance. Among the conditions included in formal regulatory actions, capital requirements have played a key role in altering bank lending behavior. The study documents that the correlation between bank capital and loan shrinkage found in earlier studies has a regulatory link, through the requirements imposed in formal actions.">
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Bank regulatory agreements in New England

Author

Listed:
  • Joe Peek
  • Eric Rosengren
Abstract
New England's recovery from our most recent recession has been marked by unusually slow growth in bank lending. As of the third quarter of 1994, total loans still had recovered only to 76 percent of the level attained at the peak in the third quarter of 1989. Numerous recent studies have identified low bank capital ratios as a factor contributing to slow growth in loans, but a direct link between the level of bank lending and bank regulation has been established only recently.> To better understand how regulatory policy might directly influence bank lending, this article examines the ways that bank supervisors intervene when a bank's financial situation deteriorates. If a bank's problems are serious, regulators will impose a formal action, a legally enforceable agreement requiring a bank to improve its performance. Among the conditions included in formal regulatory actions, capital requirements have played a key role in altering bank lending behavior. The study documents that the correlation between bank capital and loan shrinkage found in earlier studies has a regulatory link, through the requirements imposed in formal actions.

Suggested Citation

  • Joe Peek & Eric Rosengren, 1995. "Bank regulatory agreements in New England," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 15-24.
    • Handle: RePEc:fip:fedbne:y:1995:i:may:p:15-24
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    Citations

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    Cited by:

    1. Guizani, Brahim, 2010. "Regulation Policy And Credit Crunch: Evidence From Japan," MPRA Paper 46827, University Library of Munich, Germany, revised 08 May 2013.
    2. Steven Ongena, 1999. "Lending Relationships, Bank Default and Economic Activity," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 6(2), pages 257-280.
    3. John Pereira & Irma Malafronte & Ghulam Sorwar & Mohamed Nurullah, 2019. "Enforcement Actions, Market Movement and Depositors’ Reaction: Evidence from the US Banking System," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(2), pages 143-165, June.
    4. Hans Degryse & Steven Ongena, 2002. "Bank-Firm Relationships and International Banking Markets," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 9(3), pages 401-417.
    5. Brahim Guizani, 2015. "Capital requirements, banking supervision and lending behavior: evidence from Tunisia," Middle East Development Journal, Taylor & Francis Journals, vol. 7(2), pages 175-194, July.
    6. Wako Watanabe, 2004. "Does a Large Loss of Bank Capital Cause Ever-greening or Flight to Quality?: Evidence from Japan," ISER Discussion Paper 0618, Institute of Social and Economic Research, Osaka University.
    7. Cormac Cawley & Marie Finnegan, 2019. "Transmission Channels of Central Bank Asset Purchases in the Irish Economy," Economies, MDPI, vol. 7(4), pages 1-25, September.
    8. Jordan, John S. & Peek, Joe & Rosengren, Eric S., 2000. "The Market Reaction to the Disclosure of Supervisory Actions: Implications for Bank Transparency," Journal of Financial Intermediation, Elsevier, vol. 9(3), pages 298-319, July.
    9. Papadimitri, Panagiota & Staikouras, Panagiotis & Travlos, Nickolaos G. & Tsoumas, Chris, 2019. "Punished banks' acquisitions: Evidence from the U.S. banking industry," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 744-764.
    10. Götz, Martin R. & Tröger, Tobias H., 2017. "Fines for misconduct in the banking sector: What is the situation in the EU?," SAFE White Paper Series 47, Leibniz Institute for Financial Research SAFE.
    11. Shinichi Nishiyama & Tae Okada & Wako Watanabe, 2006. "Do Banks Reduce Lending Preemptively in Response to Capital Losses?," Discussion papers 06016, Research Institute of Economy, Trade and Industry (RIETI).
    12. Ongena, S. & Smith, D.C., 2000. "Bank relationships : A review," Other publications TiSEM 993b88a5-9a0f-42de-9cec-6, Tilburg University, School of Economics and Management.
    13. Cawley, Cormac & Finnegan, Marie, 2019. "Transmission channels of central bank asset purchases in the Irish economy," MPRA Paper 96547, University Library of Munich, Germany.
    14. Delis, Manthos D. & Staikouras, Panagiotis K. & Tsoumas, Chris, 2019. "Supervisory enforcement actions and bank deposits," Journal of Banking & Finance, Elsevier, vol. 106(C), pages 110-123.
    15. Wako Watanabe, 2004. "Prudential Regulation, the Credit Crunch" and the Ineffectiveness of Monetary Policy: Evidence from Japan," ISER Discussion Paper 0617, Institute of Social and Economic Research, Osaka University.
    16. Peter A. Brous & Keith Leggett, 1996. "Wealth Effects Of Enforcement Actions Against Financially Distressed Banks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 19(4), pages 561-577, December.
    17. Watanabe, Wako, 2010. "Does a large loss of bank capital cause Evergreening? Evidence from Japan," Journal of the Japanese and International Economies, Elsevier, vol. 24(1), pages 116-136, March.

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    Keywords

    Banks and banking - New England;

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