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A Tale of Two Regulators: Risk Disclosures, Liquidity, and Enforcement in the Banking Sector

58 Pages Posted: 20 Mar 2015 Last revised: 29 Feb 2016

Jannis Bischof

University of Mannheim - Accounting and Taxation

Holger Daske

University of Mannheim - Accounting and Taxation

Ferdinand Elfers

Erasmus University Rotterdam (EUR) - Department of Business Economics

Luzi Hail

University of Pennsylvania - The Wharton School

Date Written: February 27, 2016

Abstract

This paper examines the effects of heterogeneity in regulatory supervision on firms’ disclosure behavior and the ensuing capital market consequences. The effectiveness of regulation depends not only on the written rules, but also on how regulators and the firms they regulate enforce and adhere to these rules. We exploit the fact that banks are subject to quasi-identical risk disclosure rules under securities laws (IFRS 7) and banking regulation (Pillar 3 of the Basel II accord), but that different regulators enforce these rules at different points in time. We find that banks substantially increase their risk disclosures upon the adoption of Pillar 3 even if they had to comply with the same requirements under IFRS 7 beforehand. The increase is larger in countries where the banking regulator has more supervisory powers and resources and is less involved in the oversight of securities markets. It is also larger for banks most likely to attract scrutiny from the banking regulator due to distress risk. The improved risk disclosures translate into higher market liquidity around Pillar 3 but not IFRS 7. The results indicate that the success of regulation depends on the institutional fit between regulator and regulated firms, and that having multiple regulators may lead to inconsistent implementation and enforcement of the same rules.

Keywords: Disclosure regulation, Risk disclosures, Liquidity, Financial institutions, Market supervision, IFRS, Basel II, International accounting

JEL Classification: F30, G21, G28, K22, M41

Suggested Citation

Bischof, Jannis and Daske, Holger and Elfers, Ferdinand and Hail, Luzi, A Tale of Two Regulators: Risk Disclosures, Liquidity, and Enforcement in the Banking Sector (February 27, 2016). Available at SSRN: https://ssrn.com/abstract=2580569

Jannis Bischof

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Holger Daske

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Ferdinand Elfers

Erasmus University Rotterdam (EUR) - Department of Business Economics ( email )

Netherlands

Luzi Hail (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-8205 (Phone)
215-573-2054 (Fax)

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