The Benefits and Costs of Transparent Supervision of Public Banks: Evidence from Disclosure of SEC Comment Letters

Abstract

Using the SEC’s 2004 decision to begin publicly disclosing its comment letters, we study the consequences of increased regulatory transparency on the banking industry. Because the SEC only issues comment letters to public banks, we exploit a difference-in-differences design to examine the effects of increased SEC transparency on banks’ financial reporting and lending decisions. We demonstrate that, compared to private banks, public banks improve the timeliness of their loan provisions. However, the effects of enhanced regulatory transparency on banks’ lending activities are mixed. On the one hand, increased transparency slows loan growth and exacerbates procyclical lending for public banks. On the other hand, greater transparency encourages public banks to shift credit towards safer borrowers. Further analyses shed light on the mechanisms underlying these shifts. Public banks receiving CLs in the public-disclosure period experience an increase in funding costs and intensified regulatory scrutiny from other bank regulators. Taken together, these empirical findings highlight the duality of regulatory transparency for the banking industry.

Keywords: SEC Comment Letters, Regulatory Transparency, Financial Institutions, Lending, Loan Loss Provisions

JEL Classification: G18, G21, G28, M40, M41, M48