Can supervisors enforce transparent accounting when the rules leave room for management discretion?

Bischof, Jannis ; Rudolf, Nicolas ; Elfers, Ferdinand

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Document Type: Working paper
Year of publication: 2023
The title of a journal, publication series: Working Paper Series / TRR 266 Accounting for Transparency, SFB/Transregio 266
Volume: 29
Place of publication: Mannheim [u.a.]
Publishing house: TRR 266 Accounting for Transparency
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Publication language: English
Institution: Business School > ABWL u. Unternehmensrechnung (Bischof 2015-)
Subject: 330 Economics
Classification: JEL: M41 , M48 , G20 , G21 , G28,
Keywords (English): single supervisory mechanism , asset quality review , loan loss provisions , financial institutions , international accounting , enforcement
Abstract: Supervisors frequently use formal enforcement tools to intervene in banks’ financial reporting. However, when managers exercise their discretion within the boundaries of accounting rules, supervisors have to turn to soft and informal actions to nudge, rather than force banks to change their reporting. While informal interventions are generally unobservable, the Asset Quality Review (AQR) revealed the new supervisor’s preferred valuation of assets when the European Central Bank (ECB) took over the supervision of Eurozone banks. We find that banks adjusted their loan valuation to the ECB’s reporting preferences even if their prior choices were fully compliant. This effect is weaker if a strong local supervisor interferes with central supervision, pointing to the relevance of supervisory consistency in soft enforcement. The reporting changes are associated with greater informativeness of bank earnings, indicating that supervisors’ influence on bank reporting goes beyond the assurance of formal compliance and explains bank-level transparency.

Dieser Eintrag ist Teil der Universitätsbibliographie.

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