Does Capital Market Scrutiny Discourage Banks from Accommodating Distressed Borrowers?

49 Pages Posted: 13 Jan 2022 Last revised: 23 Sep 2022

See all articles by Jeffrey J. Burks

Jeffrey J. Burks

University of Notre Dame

Michael Iselin

University of Minnesota - Twin Cities - Department of Accounting

Date Written: September 22, 2022

Abstract

To encourage banks to accommodate distressed borrowers during the Covid-19 pandemic,
regulators redacted loan modification activity from each bank’s public regulatory filings so that
banks could modify loans free from capital market scrutiny. This study examines whether capital
market scrutiny does in fact discourage banks from making loan modifications, as posited by bank
regulators. To test this question we exploit the fact that the SEC still required public banks to
disclose the modifications, meaning that the type of bank that faces the most capital market
scrutiny (public banks) had to disclose loan modifications, while the type of bank that faces the
least capital market scrutiny (private banks) faced even less scrutiny of loan modifications due to
lack of disclosure. Using a measure of the extent to which banks delay collection of loan payments,
which we find to be highly correlated with actual modification activity disclosed by public banks,
we do not find significant differences in loan modification activity between public and private
banks during the pandemic. Overall, the results are not consistent with the idea that suppressing
information about loan modifications encourages additional modification activity.

Keywords: banking, lending, troubled debt restructurings, loan modifications, COVID, pandemic, disclosure

JEL Classification: M41, M48, G21

Suggested Citation

Burks, Jeffrey J. and Iselin, Michael, Does Capital Market Scrutiny Discourage Banks from Accommodating Distressed Borrowers? (September 22, 2022). Available at SSRN: https://ssrn.com/abstract=3981050 or http://dx.doi.org/10.2139/ssrn.3981050

Jeffrey J. Burks (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Michael Iselin

University of Minnesota - Twin Cities - Department of Accounting ( email )

271 19th Avenue South
Room 645 Mgt. Econ. Building
Minneapolis, MN 55455
United States

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