Does greater transparency discipline the loan loss provisioning of privately held banks?

Bischof, Jannis ; Foos, Daniel ; Riepe, Jan

Document Type: Article
Year of publication Online: 2023
Date: 20 November 2023
The title of a journal, publication series: European Accounting Review
Volume: tba
Issue number: tba
Page range: 1-31
Place of publication: London
Publishing house: Routledge
ISSN: 0963-8180 , 1468-4497
Publication language: English
Institution: Business School > ABWL u. Unternehmensrechnung (Bischof 2015-)
Subject: 330 Economics
Classification: JEL: G21 , G28 , M41 , M48,
Keywords (English): bank transparency , loan loss provisions , market discipline , privately held banks
Abstract: Whether transparency helps or hurts the stability of the financial system is an unresolved question. Recent trends have seen a decline in disclosure requirements especially for small and privately held banks. To assess the consequences of such regulations, we investigate the relationship between the transparency of loan loss provision disclosures and the provisioning practices of privately held banks. We study a unique change in disclosure regulation under German banking law which introduces mandatory disclosures of loan loss provisions. Using proprietary data provided by the national supervisor, we are able to observe provisioning practices before and after disclosure becomes mandatory. Our findings suggest that bank managers use loan loss provisions to a lesser extent for income smoothing once they are required to disclose their accounting choice. At the same time, provisions become timelier and loan portfolio quality improves. The change comes in the absence of capital market pressure and highlights the role of depositors and public pressure in the monitoring and disciplining of bank managers. Overall, these findings support the view that bank transparency helps establish financial stability.

Economic SustainabilitySDG 15: Life On Land

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