Increasing Transparency of Securitizing Banks via FAS 166/167

• In Event: Financial Reporting of Banks

Abstract

In this study, I investigate the disclosure implications of mandated regulatory changes in FAS 166/167 for securitizing banks. I examine whether FAS 166/167 improve transparency of banks by decreasing information uncertainty of securitization activities. In a difference-in-difference analysis, I compare the change in information uncertainty before and after FAS 166/167 among securitizing banks to the change in information uncertainty among non-securitizing banks. Using three measures of information uncertainty; dispersion in analysts’ earnings forecasts, implied volatility and bid-ask spread, I predict and find that information uncertainty decrease after FAS 166/167 for securitizing banks relative to a control sample of non-securitizing banks. I also find that for securitizing banks, information uncertainty is negatively associated with their involvement with VIEs in the post-FAS 166/167 period. Last, I find that for securitizing banks, FAS 166/167 decrease information uncertainty associated with the likelihood of banks providing implicit recourse. I exploit the different times of FAS 166/167 and the financial crisis of 2007-2009 to rule out the confounding effects of the crisis, and my results remain unchanged. I conclude that FAS 166/167 improve transparency of securitizing banks, which is observed in the negative association between information uncertainty and securitizations. To the best of my knowledge, this study is the first to provide evidence for the disclosure implications of FAS 166/167 for securitizations and validates the necessity of FAS 166/167. This study also provides insight about the benefits of mandatory disclosure on banks’ transparency.

Author

• Seda Oz, New York University