Regulators' Disclosure Decisions: Evidence from Bank Enforcement Actions

Abstract

Regulatory disclosure requirements induce market discipline and facilitate efficient allocation of resources by increasing firm transparency. At the same time, disclosure increases the visibility of regulatory actions, which influences the behavior of regulators. In this paper, we study the impact of a change in the disclosure regime by using the setting of the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which required bank regulators to disclose enforcement actions publicly. Using a novel sampling technique to identify enforcement actions in the non-disclosure regime, we find that regulators' incentives change after the introduction of the Act. In the disclosure regime, regulators are more likely to issue enforcement actions, as well as to rely on the publicly observable signals to issue enforcement orders, suggesting a response to the increased public scrutiny of their actions. We also find that following an enforcement action, its disclosure leads to a decline in uninsured deposits and improves banks' capital ratios and asset quality. Furthermore, enforcement actions are a stronger predictor of bank failure in the disclosure period.

Keywords: Disclosure, Enforcement actions, Regulatory incentives, Banking

JEL Classification: G21, G28