Authors: Sergio Correia, Stephan Luck, and Emil Verner
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Staff Reports
Supervising Failing Banks
Number 1168
October 2025 Revised July 2026
October 2025 Revised July 2026
JEL classification: G01, G21, N20, N24, G28, K23
We examine the role of banking supervision in identifying and disciplining failing banks. We show that bank failures typically result from supervisory closure decisions based on hard information about book equity. Yet hard information is itself partly produced by supervision, as supervisors require troubled banks to recognize potential losses. To establish causality, we exploit exogenous variation in supervisory strictness during the Global Financial Crisis. Stricter supervision leads to more loss recognition, lower book equity, and a higher likelihood and speed of closure. It also reduces FDIC resolution costs at failure but can contract credit, consistent with a trade-off between supervisory strictness and forbearance.
Author Disclosure Statement(s)
Sergio Correia
I declare that I have no relevant or material financial interests that relate to the research described in the paper “Supervising Failing Banks”. I have received no outside financial support, and no third party has a “right to review” of the paper.
Stephan Luck
I declare that I have no relevant or material financial interests that relate to the research described in this paper (Failing Banks). Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html
Emil Verner
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staD_reports/index.html.
I declare that I have no relevant or material financial interests that relate to the research described in the paper “Supervising Failing Banks”. I have received no outside financial support, and no third party has a “right to review” of the paper.
Stephan Luck
I declare that I have no relevant or material financial interests that relate to the research described in this paper (Failing Banks). Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html
Emil Verner
The author declares that he has no relevant or material financial interests that relate to the research described in this paper. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staD_reports/index.html.
Suggested Citation:
Correia, Sergio, Stephan Luck, and Emil Verner. 2025. “Supervising Failing Banks.” Federal Reserve Bank of New York Staff Reports, no. 1168, revised July 2026. https://doi.org/10.59576/sr.1168
Correia, Sergio, Stephan Luck, and Emil Verner. 2025. “Supervising Failing Banks.” Federal Reserve Bank of New York Staff Reports, no. 1168, revised July 2026. https://doi.org/10.59576/sr.1168
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