We discuss “Economic Consequences of Mandatory Auditor Reporting to Bank Regulators” by Balakrishnan, De George, Ertan, and Scobie (BDES, in this issue). BDES concludes that a key benefit of mandatory auditor reporting to bank regulators is reduced bank risk, and its costs include reduced profitability from less overall and less risky lending, and higher audit costs. BDES also provides evidence on the channels through which mandatory auditor reporting links to reduced bank risk. We scrutinize BDES's analyses and inferences and suggest additional analyses to improve and deepen them. Most notably, we caution that effective bank regulation entails reducing risk for riskier banks; risk reduction for safer banks suggests regulatory overreach. Our evidence is more indicative of regulatory overreach. Thus, although BDES is an important step forward in understanding the role auditors can and do play in improving information available to key decision-makers other than through auditor reports on financial statements and internal controls, a comprehensive assessment of whether the benefits of mandatory auditor reporting to bank regulators exceed its costs is left for future research. Such an assessment is necessary before concluding whether mandatory auditor reporting leads to more effective bank regulation or regulatory overreach

We study the economic consequences of mandates that require bank auditors to report to bank regulators. Based on survey responses from the European Central Bank, all 28 national bank regulators within the European Union, and a review of national banking regulations, we create a novel dataset on these mandates. Exploiting the cross-sectional and time-series variation in these mandates, we find evidence that auditor reporting to bank regulators reduces bank riskiness, as measured by counterparty risk and credit spreads. We also observe a decline in problem loans and risk-weighted assets, as well as improvements in timeliness of loan loss provisions. Additional analyses suggest that mandated auditor reporting increases the effectiveness of supervisory and monitoring efforts and improves market discipline of banks. However, mandated auditor reporting comes with costs: it reduces future lending growth, risky lending, and profitability, and increases audit fees paid by shareholders