Observing Enforcement: Evidence from Banking

104 Pages Posted: 4 Feb 2019 Last revised: 30 Jul 2021

See all articles by Anya Kleymenova

Anya Kleymenova

Board of Governors of the Federal Reserve System

Rimmy E. Tomy

University of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: July 27, 2021

Abstract

This paper finds that the disclosure of supervisory actions is associated with changes in regulators' enforcement behavior. Using a novel sample of enforcement decisions and orders (EDOs) and the setting of the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which required the public disclosure of EDOs, we find that U.S. bank regulators issue more EDOs, intervene sooner, and rely more on publicly observable signals after the disclosure regime change. The content of EDOs also changes, with documents becoming more complex and boilerplate. Our results are stronger in counties with higher news circulation, indicating that disclosure plays an incremental role in regulators' changing behavior. We evaluate the main potentially confounding changes around FIRREA, including the S&L crisis and competition from thrifts, and find robust results. We also study changes in bank outcomes following the regime change and find that uninsured deposits decline at EDO banks, especially for banks with EDOs covered in the news. Finally, we observe that bank failure accelerates despite improvements in capital ratios and asset quality.

Keywords: Disclosure, Enforcement actions, Regulatory incentives, Banking

JEL Classification: G21, G28

Suggested Citation

Kleymenova, Anya V. and Tomy, Rimmy, Observing Enforcement: Evidence from Banking (July 27, 2021). Chicago Booth Research Paper No. 19-05, Fama-Miller Working Paper, Available at SSRN: https://ssrn.com/abstract=3327502 or http://dx.doi.org/10.2139/ssrn.3327502

Anya V. Kleymenova (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States
202-452-2662 (Phone)

Rimmy Tomy

University of Chicago ( email )

Booth School of Business
5807 S Woodlawn Ave
Chicago, IL 60637
United States

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