Banking Regulators Operate Differently under Public Scrutiny

Along with more enforcement actions taken—for example, a bank in the 75th percentile of nonperforming assets was 1.48 times more likely than a bank in the 25th percentile to receive an EDO before FIRREA, but 1.75 times more likely after it—EDO documents themselves became longer and more complex. The average number of words increased by 46 percent, and the postdisclosure documents displayed lower clarity and higher numerical intensity and required an additional 5.5 years of education to comprehend. Further, Kleymenova and Tomy observe an increased use of boilerplate language in EDO documents after the regime change, which suggests the reports are not necessarily more informative.

They argue that these changes to the content of EDO documents indicate a concern among banking regulators for their own reputations, a notion that is corroborated by comparison of EDO issuance in counties with higher and lower news circulation before and after FIRREA. Relative to the predisclosure regime, regulators were 40 percent more likely post FIRREA to issue enforcement actions in locations with higher news circulation—the researchers define circulation using the number of newspapers relative to the county population in a given year—and they intervened 31 percent faster.

Enforcement disclosure, and regulators’ reactions to it, has had meaningful implications for affected financial institutions, argue Kleymenova and Tomy. They observe that banks served with an EDO during the post-FIRREA period they studied were 36–45 percent more likely to fail, compared with the prediclosure regime, as public disclosure drove depositors to withdraw their funds. Despite improving their capital ratios by 1 percent relative to banks without an EDO, banks receiving an EDO in the disclosure regime failed 74 percent faster, or nearly nine months earlier, than banks that received an EDO in the nondisclosure regime.