The Effects of Ratings Disclosure by Bank Regulators

Abstract

I examine how banks change their risk management practices in response to the private disclosure of regulatory ratings that summarize bank risk-taking. Upon ratings disclosure, affected banks increase the timeliness of their loan loss provisioning. These effects are concentrated among banks that lie below key rating thresholds and those headquartered in states with low competition. After ratings disclosure, deficient banks decrease commercial lending while shifting assets into cash. Overall, my findings highlight how performance measures produced and privately disclosed by a third party can influence actions within a firm.

Keywords: financial regulation; bank supervision; supervisory rating; hard information

JEL Classification: G21, G28