Competition and Bank Opacity

Abstract

Did regulatory reforms that lowered barriers to competition among U.S. banks increase or decrease the degree to which banks manage the information that they disclose to the public and regulators? We find that relaxing regulatory impediments to competition reduced discretionary loan loss provisioning and the frequency with which banks restate financial statements. The results suggest that competition reduces bank opacity, enhancing the ability of markets and regulators to monitor banks.

Competition and bank stability

“…Increasing bank competition is found to decrease bank opacity and banks disclose more information in competitive markets (Jiang et al, 2016). Greater competition may thus increase bank stability as competition also disciplines banks to increase monitoring and/or improve their selection of borrowers (Diamond, 1984).…”

“…Earlier work found that the deregulation of interstate banking and branching restrictions improved transparency (Jiang et al, 2016) and efficiency (Stiroh and Strahan, 2003) of the banking sector, enabled banks to enjoy benefits of geographic diversification (Goetz et al, 2016), spurred economic growth (Jayaratne and Strahan, 1996) and reduced inequality at the state level (Beck et al, 2010 …”

“…My work also contributes to the literature on effects of interstate banking and branching deregulation in the U.S. on the banking sector (Jayaratne andStrahan, 1997, Stiroh andStrahan, 2003;Subramanian and Yadav, 2012 among others). Similar to Jiang et al (2016), I explicitly model how the process of interstate banking deregulation affects competition. This allows me to achieve a better identification of the impact of competition on bank stability.…”

“…Specifically, I follow Goetz et al (2016) and Jiang et al (2016) and first determine how the state-specific process of interstate 1 The employed variables based on concentration are often concentration ratios of large banks or the Herfindahl index of market concentration. Structural parameters rely on insights of the new empirical industrial organization literature to assess competition (e.g.…”

Debtholder Monitoring Incentives and Bank Earnings Opacity

“…Larger absolute values of these residuals indicate greater earnings opacity. In additional tests, we use signed measures to capture whether discretionary provisioning is used to increase or decrease earnings, because managers have incentives to overstate earnings (Huizinga and Laeven (2012); Norden and Stoian (2014); Jiang et al (2016)).…”