I examine whether bank regulators and external auditors have conflicting effects on loan loss provision timeliness, an accounting choice associated with important economic consequences and a potential conflict between regulators and auditors. In the absence of the other group, auditors and strict regulators are each positively associated with timeliness. However, audits are negatively associated with timeliness when strict regulators are present, consistent with a conflict for which auditors are the dominating group as audited banks attain a similar level of timeliness regardless of the extent of regulatory scrutiny. Collectively, this suggests that regulators and auditors differentially influence loan loss provisions.

This paper examines whether public bank managers change both the composition and classification of their investment portfolios after SFAS 157. We first show that non-agency mortgage-backed securities (MBSNA) are the asset class most likely to be measured using level 3 inputs, which are based on unobservable information. We then find that relative to a control sample of private banks, public banks altered their investment portfolios in a manner that reduced the percentage of MBSNA holdings for which SFAS 157 disclosures are required. Taken together, this evidence is consistent with public banks attempting to avoid disclosure of level 3 assets through changes in both asset composition and classification.

ABSTRACT We examine the economic consequences of a rule designed to improve consumers' understanding of mortgage information. The 2015 TILA‐RESPA Integrated Disclosures rule (TRID) simplifies the mortgage disclosures provided to consumers. As a consequence, TRID‐affected mortgages become a less attractive investment opportunity to banks. Our main results document that mortgage applications affected by TRID are less likely to be approved following the rule's effective date. We find evidence consistent with both a decrease in consumers' information processing costs and an increase in banks' secondary market frictions, providing insight into the potential channels through which this reduction in mortgage credit operates. We also find that banks partially compensate for reduced mortgage lending by increasing small business lending, and that fintechs absorb mortgage demand in areas with reduced mortgage lending by banks. Our study documents real actions that firms take in response to disclosure transparency regulation and contributes to the literature on the economic consequences of such regulation.

Employing a novel control function regression method that accounts for the endogenous matching of banks and executives, we find that equity portfolio vega, the sensitivity of executives’ equity portfolio value to their firms’ stock return volatility, leads to systemic risk that manifests during subsequent economic contractions but not expansions. We further find that vega encourages systemically risky policies, including maintaining lower common equity Tier 1 capital ratios, relying on more run-prone debt financing, and making more procyclical investments. Collectively, our evidence suggests that executives’ incentive-compensation contracts promote systemic risk-taking through banks’ lending, investing, and financing practices.

We examine whether variation in regulatory leniency is associated with the cost of deposits in the banking industry. We predict that lenient regulatory supervision allows for greater bank risk-taking due to delayed intervention, resulting in a higher cost of deposits. Our main finding is a positive association between banks’ cost of uninsured deposits and the leniency of their state regulators, incremental to observable measures of risk and performance. We further show that this result is stronger for riskier banks and when uninsured depositors have a greater ability or incentive to influence deposit rates. These findings suggest that the leniency of bank regulators is priced in uninsured deposit rates and further our understanding of the factors associated with regulatory leniency in the banking industry.

ABSTRACT We examine whether auditor scrutiny over the allowance for loan losses (ALL) is associated with bank lending decisions. Using PCAOB inspection findings over the ALL to capture increases in auditor scrutiny, we find that auditor scrutiny is associated with a larger ALL for homogeneous loans (i.e., residential mortgages and consumer loans) but not for heterogeneous loans (i.e., commercial real estate; commercial and industrial loans). We next find that auditor scrutiny is associated with a shift in lending away from homogeneous loans, consistent with auditor scrutiny reducing the relative attractiveness of homogeneous loans. These findings suggest that policymakers and audit regulators can indirectly affect bank lending by exercising their authority in ways that affect auditor scrutiny. Data Availability: All data are publicly available from the sources discussed in the paper. JEL Classifications: G21; M42; M48.

ABSTRACT Auditor credibility is important in the banking industry due to the opacity of bank assets and the use of financial statements by external parties to facilitate monitoring. Depositors monitor and discipline bank behavior, but they can also contribute to the spread of shocks from one bank to another. We argue that depositors perceive bank failure as an audit failure, which reduces their assessment of auditor credibility. We document that exposure to failure through the audit firm is associated with lower uninsured deposit growth following the failure, consistent with depositors perceiving failures as a negative signal of auditor credibility. We further document that this association is stronger when depositors perceive connection to failure to reflect a pervasive issue within the audit firm. Collectively, our results suggest that depositors consider accounting signals at other banks in assessing financial reporting credibility. JEL Classifications: G21; M41; M42.