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. However, disclosure also increases the visibility of regulatory actions, which influences the behavior of regulators. We study the effect of disclosure on regulators' incentives 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 sample of 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 publicly observable signals to issue enforcement orders, suggesting a response to the increased public scrutiny of their actions. We also find that disclosure leads to a decline in deposits and improves banks’ capital ratios and asset quality. Furthermore, we find that enforcement actions are a stronger predictor of bank failure in the disclosure regime and that the disclosure of enforcement actions accelerates bank failure.

Keywords: Disclosure, Enforcement actions, Regulatory incentives, Banking

JEL Classification: G21, G28