Do Strict Regulators Increase the Transparency of the Banking System?
54 Pages Posted: 21 Jun 2015 Last revised: 26 May 2016
Date Written: May 24, 2016
We investigate the role of regulatory incentives on the enforcement of financial reporting transparency in the U.S. banking industry. The previous literature suggests that banking regulators use discretion to facilitate regulatory forbearance. Yet, is not clear whether these actions result from lax oversight or whether they are necessary to prevent further financial instability. Using a novel measure of the quality of regulatory enforcement, we show that strict regulators are more likely to enforce income-reducing reporting choices by forcing banks to restate their overly aggressive call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our analyses are consistent with the notion that regulatory incentives play an important role in enforcing financial reporting transparency, particularly in periods leading up to economic crises.
Keywords: Banking, Accounting Transparency, Regulatory Forbearance
JEL Classification: G01, G21, G28, M41
Suggested Citation: Suggested Citation