Does Monetary Policy Affect the Central Bank's Role in Bank Supervision?

Abstract

This paper examines whether monetary policy responsibilities alter the central bank's role as a bank supervisor. The analysis focuses on the U.S., where the FED shares supervisory duties with two other federal agencies, namely the OCC and the FDIC. Among these three institutions, the FED is the only one responsible for monetary policy. Hence, using banks supervised by the FDIC and the OCC as a control group, the FED's supervisory behavior is compared with the other two agencies. The comparison is made using a new panel dataset that includes all insured commercial and savings banks in the U.S., and all formal regulatory actions issued against these institutions during the period 1990:I- 1998:IV. The results suggest that the FED's monetary policy duties do alter its role in bank supervision: indicators of monetary policy affect the supervisory actions of the FED, but do not affect the actions of the other two agencies. However, the scenario in which the FED uses bank supervision to reinforce the objectives of monetary policy is rejected.