The Effects of Ratings Disclosure by Bank Regulators

59 Pages Posted: 17 May 2018

See all articles by Yadav Gopalan

Yadav Gopalan

Indiana University - Kelley School of Business - Department of Accounting

Date Written: April 25, 2018

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

Suggested Citation

Gopalan, Yadav, The Effects of Ratings Disclosure by Bank Regulators (April 25, 2018). Kelley School of Business Research Paper No. 18-46, Available at SSRN: https://ssrn.com/abstract=3164528 or http://dx.doi.org/10.2139/ssrn.3164528

Yadav Gopalan (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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