Unintended Consequences of the Increased Asset Threshold for FDICIA Internal Controls: Evidence from U.S. Private Banks

41 Pages Posted: 3 Sep 2013 Last revised: 5 Oct 2014

See all articles by Justin Yiqiang Jin

Justin Yiqiang Jin

McMaster University - DeGroote School of Business

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: July 1, 2013

Abstract

We examine the unintended consequences of the 2005 increase from $500 million to $1 billion in the asset threshold for the Federal Deposit Insurance Corporation Improvement Act (FDICIA) internal control reporting requirements. We focus on a test sample of banks that increased their total assets from between $100 million and $500 million prior to the change in regulation to between $500 million and $1 billion within two years following the change. These “affected” banks are no longer subject to the internal control requirements but would have been had the regulation not been changed. We hypothesize that these affected banks are likely to make riskier loans, which will increase the likelihood of failure during the crisis period. We find evidence consistent with this hypothesis. Affected banks have higher likelihood of failure during the crisis period than banks from two different control samples. We also find that auditor reputation (i.e., whether the bank is audited by a Big 4 auditor or an industry specialist auditor) has a moderating effect on the likelihood of failure for these affected banks.

Keywords: FDICIA, Internal Controls, Bank Failure, Bank Financial Trouble, Audit Quality

JEL Classification: G14, G21, M41, M42

Suggested Citation

Jin, Justin Y. and Kanagaretnam, Kiridaran and Lobo, Gerald J., Unintended Consequences of the Increased Asset Threshold for FDICIA Internal Controls: Evidence from U.S. Private Banks (July 1, 2013). Journal of Banking and Finance, Vol. 37, 2013, Available at SSRN: https://ssrn.com/abstract=2319552 or http://dx.doi.org/10.2139/ssrn.2319552

Justin Y. Jin

McMaster University - DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada
905-525-9140 ext. 26194 (Phone)
905-521-8995 (Fax)

Kiridaran Kanagaretnam (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

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