Subordinates in Charge: Does Delegation Improve Bank Supervision?

Abstract

We develop a model of bias and information loss in supervisory communication and apply it to evaluate a policy reform that delegated supervisory authority over a subset of bank branches to a lower level. Affected branches become 57-80% more likely to face supervisory intervention, implying substantial efficiency gains arising from improved detection of banking misconduct and more accurate assessments of its severity. The evidence is inconsistent with alternative explanations, including increased supervisory stringency or greater risk-taking by banks. Our analysis highlights decentralization benefits within supervisory hierarchies specifically, and speaks to the optimal organizational design for fraud detection more broadly.