Observing Enforcement: Evidence from Banking

Abstract

We find that the public disclosure of regulators' supervisory actions changes their enforcement behavior. Using a novel sample of enforcement actions and orders (EDOs) and the setting of the 1989 Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA), which required public disclosure of EDOs, we find that U.S. banking 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. We show that EDOs disclosure affects regulators' behavior over and above other changes that occurred around FIRREA. Taken together, our results suggest regulators respond to the increased public scrutiny of their actions.

Keywords: Disclosure, Enforcement actions, Regulatory incentives, Banking

JEL Classification: G21, G28