Regulatory change and the financial reporting quality of US depository institutions

Abstract

This thesis analyses the linkages between financial industry regulation and the reporting quality of commercial banks and credit unions. The thesis is comprised of three substantive empirical studies using large datasets of banks and credit unions located in the United States. Chapter 2 investigates the impact of the separation of audit and risk committees mandated by Section 165h of the Dodd-Frank Act on banks’ financial reporting quality. We find that the separation of audit and risk committees leads to an improvement in financial reporting quality. We attribute the observed improvements in financial reporting quality to the increased focus of audit committees arising from a reduction in the volume and complexity of tasks undertaken following the implementation of Section 165h. Chapter 3 investigates the impact of the imposition of minimum capital requirements on credit unions’ financial reporting quality. We find that affected credit unions improve their financial reporting quality through a reduction in discretionary loan loss provisions. This improvement is more prominent for affected credit unions that are less profitable. Overall, our results suggest that credit unions which should increase their capital to meet the minimum capital requirements improve their financial reporting quality. Chapter 4 examines the impact of deposit insurance regulation on credit union financial reporting quality. We find that credit unions most affected by the change in deposit insurance coverage report more discretionary loan loss provisions than less affected counterparts, leading to a deterioration in financial reporting quality. This effect is more pronounced for “small” and “medium” credit unions according to their size. Furthermore, we find that low- capitalized credit unions exercise less discretion over loan loss provisions consistent with capital management. Overall, our results suggests that credit unions holding more insured deposits report more discretionary loan loss provisions at the expense of financial reporting quality and transparency. Finally, Chapter 5 provides a summary of main findings as well as limitations of this research and recommendations for future work.