Economic Consequences of Mandatory Auditor Reporting to Bank Supervisors

72 Pages Posted: 10 Jan 2020 Last revised: 24 Oct 2020

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: October 2020

Abstract

We study the economic consequences of mandates that require bank auditors to report to bank supervisors. 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 of the extent of these mandates. Exploiting the cross-sectional and time-series variation in these mandates, we investigate the effects of mandated auditor reporting on bank risk. We find evidence that auditor reporting reduces bank riskiness, as measured by counterparty risk, nonperforming loans, and credit spreads. We also observe a decline in risk-weighted assets, which suggests that mandated auditor reporting enhances the effectiveness of regulatory supervision. In addition, we find that improvements to the supervisory review process and to banks’ information environment support enhanced market discipline. Finally, mandated auditor reporting comes with costs: it reduces future lending growth and profitability, as well as increases audit fees paid by shareholders.

Keywords: credit risk, regulation, bank supervision, information sharing, banking, auditing

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 (October 2020). University of Miami Business School Research Paper No. 3510389, 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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