A Tale of Two Supervisors: Compliance with Risk Disclosure Regulation in the Banking Sector
70 Pages Posted: 20 Mar 2015 Last revised: 3 May 2019
Date Written: May 1, 2019
This paper examines how a regulatory design with multiple supervisory agencies translates into firm-level compliance in form and substance with new 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 enforce the rules at different points in time. We find that banks substantially increase their 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 competition and with more supervisory powers and resources are better at imposing the written rules while, in turn, firms fearing regulatory scrutiny or market pressures are better in following the rules. However, formal compliance with the rules does not automatically convert into more transparent reporting. Liquidity and returns-based tests show that the enhanced risk disclosures were only material to investors following Pillar 3 and for certain disclosure items, but not around IFRS 7 or with a supposedly better enforcement infrastructure in place.
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