Author(s):
Yadav Gopalan, Joao Granja
Date:
September 2023
Abstract:
We investigate how effective was bank supervision before, during, and after the monetary tightening of 2022. We find that bank supervisors were aware of the interest rate risks that were emerging in the banking system and began downgrading the ratings of banks with significant exposures to such risks as early as the second quarter of 2022. We do not find that bank supervisors were more likely to downgrade banks whose excessive reliance on uninsured deposits posed liquidity risks. Rating downgrades were associated with subsequent declines in exposures to interest rate risks and with increases in bank liquidity. Overall, our evidence supports the idea that regulators made the banking system safer by limiting the interest rate risk exposures and propping up bank liquidity of many banks as the Federal Reserve began raising interest rates in the second quarter of 2022.
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