The unintended consequences of the launch of the single supervisory mechanism in Europe

The launch of the Single Supervisory Mechanism (SSM) was an historic event. Beginning in Nov. 2014, the most significant banks came under the direct supervision of the European Central Bank, while national supervisory authorities maintained direct supervision of the remaining banks. Thus, supervision is conducted on two levels, which could cause inconsistency problems. Did the behavior of the significant banks differ from that of the less significant banks during the SSM launch? We find that the significant banks reduced their lending activity more than the less significant banks did in order to shrink their balance sheets and increase their capitalization.

This article has been published in a revised form in Journal of Financial and Quantitative Analysis -
https://doi.org/10.1017/S0022109017000886. This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. © Michael G. Foster School of Business, University of Washington 2017