Economic Consequences of Mandatory Auditor Reporting to Bank Supervisors

82 Pages Posted: 10 Jan 2020 Last revised: 10 Aug 2021

See all articles by Karthik Balakrishnan

Karthik Balakrishnan

Rice University - Jesse H. Jones Graduate School of Business

Emmanuel T. De George

University of Miami

Aytekin Ertan

London Business School

Hannah Scobie

European Economics & Financial Centre

Date Written: July 1, 2021

Abstract

We study the economic consequences of mandates that require bank auditors to report to bank regulators. Based on survey responses from the European Central Bank and all 28 national bank regulators within the European Union and a review of national banking regulations, we create a novel dataset on these mandates. Exploiting the cross-sectional and time-series variation in these mandates, we find evidence that auditor reporting to bank regulators reduces bank riskiness, as measured by counterparty risk and credit spreads. We also observe a decline in problem loans and risk-weighted assets, as well as improvements in timeliness of loan loss provisions. Additional analyses suggest that mandated auditor reporting increases the effectiveness of supervisory and monitoring efforts and improves market discipline of banks. However, mandated auditor reporting comes with costs: it reduces future lending growth, risky lending, and profitability, and increases audit fees paid by shareholders.

Keywords: credit risk, banking; auditing; bank risk; regulation; bank regulation; supervision

JEL Classification: G28, G34, G38

Suggested Citation

Balakrishnan, Karthik and De George, Emmanuel T. and Ertan, Aytekin and Scobie, Hannah, Economic Consequences of Mandatory Auditor Reporting to Bank Supervisors (July 1, 2021). University of Miami Business School Research Paper No. 3510389, Journal of Accounting & Economics (JAE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3510389 or http://dx.doi.org/10.2139/ssrn.3510389

Karthik Balakrishnan

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

Emmanuel T. De George (Contact Author)

University of Miami ( email )

Coral Gables, FL 33146-6531
United States
305-284-2273 (Phone)

Aytekin Ertan

London Business School ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom
442070008131 (Phone)

Hannah Scobie

European Economics & Financial Centre ( email )

Senate House, Malet Street
London, WC1E 7HU
United Kingdom

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