Does Bank Opacity Enable Regulatory Forbearance? Public Deposited

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  • March 22, 2019
  • Gallemore, John Douglas
    • Affiliation: Kenan-Flagler Business School
  • Regulators are charged with closing troubled banks, but can instead practice forbearance by allowing these troubled banks to continue operating. This paper examines whether bank opacity affects regulators' ability to practice forbearance. Opacity inhibits non-regulator outsiders from accurately assessing bank risk, potentially allowing regulators to forgo intervention. Employing a sample of U.S. commercial banks during the recent crisis, I find that bank opacity is positively associated with a new measure of forbearance and negatively associated with the probability of failing during the crisis. Cross-sectional results are consistent with opacity being more important for forbearance when (1) regulators' incentives are stronger (as measured by bank connectedness) and (2) outsiders' incentives to monitor are stronger (as measured by the proportion of deposits that are uninsured). These results suggest that opacity enables regulators to forbear on connected banks to prevent financial sector contagion and to disguise forbearance from uninsured creditors. This study contributes to the literature on the role of accounting in forbearance by being the first to show the effect of bank-level opacity on the regulator's decision to intervene or forbear.
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  • In Copyright
  • Maydew, Edward
  • Doctor of Philosophy
Graduation year
  • 2013

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