Joao Granja is Assistant Professor of Accounting and Christian Leuz is the Joseph Sondheimer Professor of International Economics, Finance and Accounting, at the University of Chicago Booth School of Business. This post is based on their recent paper.
A recurring theme in banking crises is the public backlash against bank supervisors for their failure to take prompt and decisive action to unearth and correct problems of weak banks. The latest crisis is no exception. A recent poll by the Initiative on Global Markets (IGM) at the Booth School of Business shows that leading economists view “flawed financial sector regulation and supervision” as the most important factor contributing to the 2008 Global Financial Crisis. Perceived regulatory failures in the past often play an important role in justifying interventions that overhaul the regulatory oversight of the banking system, including tighter rules and stricter monitoring of financial institutions (e.g., Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989; Dodd-Frank Act of 2010). Despite the importance of such interventions, we have limited evidence on the economic trade-offs associated with reforms that aim to limit regulatory forbearance and promote stricter bank supervision.
