Enforcement action and risk disclosure level of banks in prudential US banking

Banks are regularly encouraged to enhance their disclosures to improve their transparency. However, banks’ willingness to disclose their risks varies according to many factors and supervision is one of the crucial factor. As enforcement actions are one of the important supervisory mechanism we investigate the impact of enforcement action on bank’s risk disclosure level. Using self-constructed risk disclosure index we find significant negative relationship between enforcement actions and bank’s risk disclosure level of the sanctioned bank. We also find significant negative relationship between mahalanobis distance and risk disclosure level when we proxy enforcement action using mahalanobis distance to find risk disclosure level of non-sanctioned banks. Our findings show that banks subject to enforcement action lower their risk disclosure level, whereas non-sanctioned but close to sanctioned banks increase their disclosure level when their close competitors are subjected to enforcement action.