Does Disclosure of Shadow Bank Exposures Affect Bank Risk Management?

Abstract

This study examines whether disclosure regulation affects banks' risk management. In May 2024, U.S. regulators mandated enhanced disclosure of lending to shadow banks to facilitate monitoring of the loan risk. Using a difference-indifferences design, we find that affected banks strengthen risk oversight by increasing hiring in regulatory compliance, audit, and information technology. The enhanced risk management is concentrated among banks with greater shadow bank exposure, higher ex ante credit risk, and stronger incentives to demonstrate high quality of loans extended to shadow banks in public disclosures. We further document evidence suggesting positive spillover effects to shadow banks: nonbank mortgage lenders reduce risky loan origination and experience a significant decline in consumer complaints. Collectively, our findings indicate that disclosure regulation influences banks' risk management practices by inducing them to internalize the risks arising from their partnerships with shadow banks.

Keywords: Disclosure, Shadow Bank, Risk Management, Job Posting, Regulation

JEL Classification: G21, G23, G28, M48