European Central Bank researchers found that in-person bank supervision creates more lasting change than remote reviews. The study examined how targeted reviews versus on-site inspections affected commercial real estate lending practices after the pandemic. Banks subjected to physical visits showed immediate and permanent improvements in their coverage ratios - the measure of bad debt provisions against loan books.

On-site inspections require teams to visit bank offices and examine records face-to-face, making them more resource-intensive than desk-based targeted reviews. However, the ECB team discovered that while targeted reviews boost conservatism for up to a year, on-site visits produce enduring behavioral changes. This matters because banks with weak risk management often under-reserve, convincing themselves troubled loans are healthier than reality.

The research, conducted by Jae Hyun Jo, Stefano Demartis and Spyros Palligkinis, controlled for differences in bank risk profiles and starting positions. Despite their effectiveness, on-site inspections cost more and strain supervisory resources, limiting how widely regulators can deploy them. Targeted reviews remain valuable for broad industry monitoring.

Regulators face a trade-off between thoroughness and scale. The ECB findings suggest that European Central Bank supervisors achieve better risk mitigation when they can look bankers in the eye, though budget constraints mean both tools remain necessary.