Measuring fraud in banking and its impact on the economy: a quasi-natural experiment

0573338 - NHU-C 2024 CZ eng V - Výzkumná zpráva
Mamonov, Mikhail
Measuring fraud in banking and its impact on the economy: a quasi-natural experiment.
Prague: CERGE-EI, 2023. 65 s. CERGE-EI Working Paper Series, 755. ISSN 2788-0443
Institucionální podpora: Cooperatio-COOP
Klíčová slova: bank misreporting * regulatory forbearance * bank closure
Obor OECD: Applied Economics, Econometrics
https://www.cerge-ei.cz/pdf/wp/Wp755.pdf

This paper suggests a novel approach to measuring fraud in banking and to evaluating its cross-sectional and aggregate implications. I explore unique evidence of declining regulatory forbearance from the Russian banking system in the 2010s, when the central bank forcibly closed roughly two-thirds of all operating banks for fraudulent activities. I first introduce an empirical model of the regulatory decision rule that determines whether a regulator is likely to run an unscheduled onsite inspection of a suspicious bank in the near future. I estimate the model using unique data on asset losses hidden by commercial banks and discovered by the Central Bank of Russia during unscheduled on-site inspections in the last two decades. I find that the average size of hidden asset losses detected by the rule equals 38% of the total assets of not-yet-closed fraudulent banks, and that the likelihood of fraud detection soared by a factor of 5 after 2013. With quarter-by-quarter predictions from the estimated rule, I form a “treatment” group of likely-to-be-inspected banks and then run a “fuzzy” difference-in-differences (FDID) regression to estimate the effects of the tightened regulation. FDID estimates show that likely-to-be-inspected banks substantially reduced credit to households and firms after the policy started in 2013, compared to similar untreated banks. Interpreting the FDID estimates of credit contraction as a credit supply shock and evaluating the macroeconomic implications of this shock using a VAR model of the Russian economy, I find that Russia’s GDP could have been larger by 7.3% cumulatively by the end of 2016 in the absence of the policy. This is the price the economy pays for reducing fraud in the banking system.
Trvalý link: https://hdl.handle.net/11104/0343801