Bank for International Settlements working paper finds Brazil’s SupTech supervision improves risk reporting and curbs lending to riskier firms

The Bank for International Settlements published a working paper assessing whether supervisory technology can discipline bank behaviour, using confidential data on early-warning “SupTech events” from the Central Bank of Brazil. The study finds that, after SupTech-driven supervisory scrutiny, affected lenders correct inconsistencies in credit risk reporting and reallocate lending away from less creditworthy firms, consistent with a moral suasion channel. After a SupTech event, treated banks reclassify more loans as non-performing and increase provisions for expected loan losses by around 20%, with no material impact on capital buffers or loans-to-assets and only a small decline in profitability. Loan-level evidence shows no average cut in overall credit supply, but credit to borrowers with payments in arrears falls by about 3–5%, alongside higher loan rates (around 9–10%) and shorter maturities (around 15–17%); treated banks’ internal ratings of their riskiest borrowers also move closer to those assigned by non-treated lenders. Effects are stronger for events related to regulatory non-compliance, when handled by more experienced supervisory teams, and for banks located further from the supervisory authority, and the paper also reports within-municipality spillovers where non-targeted banks increase recognised problem loans and provisioning by about 10–12%. Spillovers to the real economy are limited on average, but less creditworthy firms more exposed to treated lenders cannot fully replace lost credit and experience small declines in employment and revenues of about 1%.