The Single Supervisory Mechanism—A Curse or a Blessing for Banks’ Financial Reporting Quality?

• In Event: Banking

Abstract

This paper uses the introduction of the Single Supervisory Mechanism (SSM) in the euro-banking area in 2014 to investigate the effect of strict and homogenous banking supervision on banks’ financial reporting credibility. Applying a difference-in-differences research design I exploit the fact that the change in banking supervision affected only some but not all banks in Europe. Using earnings response coefficients as a proxy to account for financial reporting credibility, my first results reveal that banks that are exposed to the new banking supervision experience an increase in reporting credibility. Cross-sectional analyses reveal that the incremental effect is positive and statistical significant for banks that were previously facing supervisors with strong influence in banks’ information environment and negative for banks that were previously exposed to supervisors with strong influence into their business activity. I further show that treated banks significantly increase their Pillar 3 report compared to non-SSM banks.

Author

• Melanie Demirtas, Frankfurt School of Finance & Management gGMBH