A Tale of Two Supervisors: Compliance with Risk Disclosure Regulation in the Banking Sector
70 Pages Posted: 20 Mar 2015 Last revised: 14 Jan 2020
Date Written: January 13, 2020
This paper examines how a regulatory design with multiple supervisory agencies translates into firm-level compliance in form and substance with disclosure regulations. We exploit the fact that banks are subject to equivalent risk disclosure rules under securities laws (IFRS 7) and banking regulation (Pillar 3 of the Basel II accord), but that different regulators start enforcing the rules at different points in time. We find that banks substantially increase their formal risk disclosures upon the adoption of Pillar 3 even if they already had to comply with the same requirements under IFRS 7. Regulators facing stronger institutional competition and with more supervisory powers and resources are stricter in imposing the written rules while, in turn, firms fearing regulatory scrutiny or market pressures are more forthcoming in following the rules. However, formal compliance with the disclosure requirements does not necessarily convert into more transparent reporting. Liquidity and returns-based tests show that the materiality of the enhanced risk disclosures for investors was concentrated around Pillar 3 adoption and associated with the content of certain disclosure items.
Keywords: Disclosure regulation, Risk disclosures, Liquidity, Financial institutions, Market supervision, IFRS, Basel II, International accounting
JEL Classification: F30, G21, G28, K22, M41
Suggested Citation: Suggested Citation