Observing Enforcement: Evidence from Banking

Abstract

We find the public disclosure of regulators' actions influences their enforcement behavior. Using a change in regulation regime, which required disclosure of bank enforcement actions (EDOs), we find that regulators start issuing more EDOs, intervening sooner, and relying more on publicly observable signals. The content of EDOs also changes, with documents becoming more complex and boilerplate. Our results suggest regulators respond to the increased public scrutiny of their actions. We also assess the impact of disclosure on bank outcomes and find a decline in deposits and an acceleration of bank failure, despite improvements in banks' capital ratios and asset quality.

Keywords: Disclosure, Enforcement actions, Regulatory incentives, Banking

JEL Classification: G21, G28