Bank Financial Reporting Opacity and Regulatory Intervention
64 Pages Posted: 14 Sep 2016 Last revised: 1 Mar 2021
Date Written: February 2021
I study the association between bank financial reporting opacity, measured by delayed expected loan loss recognition, and the intervention decisions made by bank regulators. Examining U.S. commercial banks during the 2007-2009 financial crisis, I find that delayed expected loan loss recognition is negatively associated with the likelihood of regulatory intervention (measured by either severe enforcement action or closure). This result is robust to using various specifications and research designs. In additional analyses, I find evidence suggesting that this association is driven by regulators exploiting financial reporting opacity to practice forbearance. My findings contribute to the extant literature on bank opacity, regulatory forbearance, and the consequences of loan loss provisioning by suggesting that delayed expected loan loss recognition affects regulatory intervention decisions.
Keywords: regulatory intervention, bank closure, enforcement actions, forbearance, loan loss provisioning, banking crises
JEL Classification: G21, G28, M41
Suggested Citation: Suggested Citation