The Effects of Ratings Disclosure by Bank Regulators

Abstract

Using a confidential dataset from bank regulators, I examine how banks respond to the staggered disclosure of previously hidden regulatory ratings using a difference-in-differences empirical approach. Upon ratings disclosure, affected banks increase loan loss provisions, loan charge-offs, equity issuances, and decrease dividends. These effects are concentrated in banks that lie below key regulatory rating thresholds, while banks above such thresholds take no such actions. This asymmetric response is associated with future changes in asset quality and future CAMEL ratings. Banks above key thresholds decrease asset quality and are assigned incrementally less-favorable ratings, while banks below such thresholds increase asset quality and are assigned incrementally more-favorable ratings. My findings highlight how the disclosure of contractible information from bank regulators affects banks' actions and thus regulators' ability to achieve their objectives.

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