Abstract
We highlight an important macro-financial linkage: Severe regulatory enforcement actions such as Formal agreements, Prompt corrective actions, and Cease and desist orders on banks trigger temporarily adverse effects for the macroeconomy. We use instrumental variables regressions to show that such actions imposed on single-market banks reduce personal income growth, the number of establishments, and increase unemployment in U.S. counties. These effects are related to contractions in bank lending and liquidity creation. Our identification is sharpened by a series of tests based on falsification tests and placebo enforcement actions. We can rule out several alternative explanations that may confound our results.
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