An Investigation on the Effect of the Bank Opacity on the Regulatory Forbearance

Objective: One of the recent debates in the banking system is whether the bank opacity is an optimal approach or not. On one side, the bank opacity is known as an important factor to banking crisis as it prevents users to better analyze the banks. On the other hand, the bank transparency as the oppo...

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Autores principales:	Sasan Mehrani, Faezeh Mohammadi Oroojeh
Formato:	article
Lenguaje:	FA
Publicado:	University of Tehran 2021
Materias:	bank opacity banking crisis regulatory forbearance Accounting. Bookkeeping HF5601-5689 Finance HG1-9999
Acceso en línea:	https://doaj.org/article/72cc755c2ff749afa057b0b6de93c16a
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spelling	oai:doaj.org-article:72cc755c2ff749afa057b0b6de93c16a2021-11-14T05:28:27ZAn Investigation on the Effect of the Bank Opacity on the Regulatory Forbearance2645-80202645-803910.22059/acctgrev.2021.324265.1008560https://doaj.org/article/72cc755c2ff749afa057b0b6de93c16a2021-10-01T00:00:00Zhttps://acctgrev.ut.ac.ir/article_84154_9445c5a1d8bcaf9bdc78c84dd2759d92.pdfhttps://doaj.org/toc/2645-8020https://doaj.org/toc/2645-8039Objective: One of the recent debates in the banking system is whether the bank opacity is an optimal approach or not. On one side, the bank opacity is known as an important factor to banking crisis as it prevents users to better analyze the banks. On the other hand, the bank transparency as the opposite side of bank opacity may end in spreading financial crisis as it causes depositors to run to withdraw their deposits (bank runs). Bank regulators are responsible to monitor banks and making decisions regarding troubled banks. Regulators may decide to forbear instead of corrective actions for many reasons. Regulatory forbearance provides the troubled bank with the opportunity to recover and prevents costly intervention of regulators. However, some researches shows that the regulatory forbearance may let the troubled bank take more risk and ends with an increase in the cost of intervention. Forbearance is the most common practice of regulators especially in financial crisis during which limiting the loss of depositors' and creditors' confidence is one of the core purposes. Also, if the troubles of a bank get disclosed to outsiders, the regulator will be under pressure to close the banks. This study has implications for the debate of bank opacity and its role in bank regulators' policy selection. Methods: To test the hypotheses, the OLS regression model is used for panel data analysis. Bank opacity is measured via 2 more popular methods used in recent researches. In addition, to control for confounding effects of different years, we added dummy variables to the regression models. The data obtained from the financial statements of 20 commercial banks from 2014 to 2020. Results: Results show that the banking system suffers from crisis during the period of investigation and the bank opacity has a positive relation with regulatory forbearance. Furthermore, the results show that opacity is more important for forbearance when (1) regulators’ incentives are greater (as measured by bank connectedness) and (2) outsiders’ incentives to monitor are stronger (as measured by the proportion of nondepository debtholders). In addition, results indicate that bank opacity has negative relation with the probability of failing during a crisis. Conclusion: The findings indicate that the opacity enables regulators to forbear and contribute to the debate regarding bank opacity being optimal or not. This study furthers our understanding of the role of accounting in helping bank regulators to better define approaches they can take during a financial crisis. These results suggest that bank opacity can be desirable during a crisis period.Sasan MehraniFaezeh Mohammadi Oroojeh University of Tehranarticlebank opacitybanking crisisregulatory forbearanceAccounting. BookkeepingHF5601-5689FinanceHG1-9999FAبررسی‌های حسابداری و حسابرسی, Vol 28, Iss 3, Pp 487-506 (2021)
institution	DOAJ
collection	DOAJ
language	FA
topic	bank opacity banking crisis regulatory forbearance Accounting. Bookkeeping HF5601-5689 Finance HG1-9999
spellingShingle	bank opacity banking crisis regulatory forbearance Accounting. Bookkeeping HF5601-5689 Finance HG1-9999 Sasan Mehrani Faezeh Mohammadi Oroojeh An Investigation on the Effect of the Bank Opacity on the Regulatory Forbearance
description	Objective: One of the recent debates in the banking system is whether the bank opacity is an optimal approach or not. On one side, the bank opacity is known as an important factor to banking crisis as it prevents users to better analyze the banks. On the other hand, the bank transparency as the opposite side of bank opacity may end in spreading financial crisis as it causes depositors to run to withdraw their deposits (bank runs). Bank regulators are responsible to monitor banks and making decisions regarding troubled banks. Regulators may decide to forbear instead of corrective actions for many reasons. Regulatory forbearance provides the troubled bank with the opportunity to recover and prevents costly intervention of regulators. However, some researches shows that the regulatory forbearance may let the troubled bank take more risk and ends with an increase in the cost of intervention. Forbearance is the most common practice of regulators especially in financial crisis during which limiting the loss of depositors' and creditors' confidence is one of the core purposes. Also, if the troubles of a bank get disclosed to outsiders, the regulator will be under pressure to close the banks. This study has implications for the debate of bank opacity and its role in bank regulators' policy selection. Methods: To test the hypotheses, the OLS regression model is used for panel data analysis. Bank opacity is measured via 2 more popular methods used in recent researches. In addition, to control for confounding effects of different years, we added dummy variables to the regression models. The data obtained from the financial statements of 20 commercial banks from 2014 to 2020. Results: Results show that the banking system suffers from crisis during the period of investigation and the bank opacity has a positive relation with regulatory forbearance. Furthermore, the results show that opacity is more important for forbearance when (1) regulators’ incentives are greater (as measured by bank connectedness) and (2) outsiders’ incentives to monitor are stronger (as measured by the proportion of nondepository debtholders). In addition, results indicate that bank opacity has negative relation with the probability of failing during a crisis. Conclusion: The findings indicate that the opacity enables regulators to forbear and contribute to the debate regarding bank opacity being optimal or not. This study furthers our understanding of the role of accounting in helping bank regulators to better define approaches they can take during a financial crisis. These results suggest that bank opacity can be desirable during a crisis period.
format	article
author	Sasan Mehrani Faezeh Mohammadi Oroojeh
author_facet	Sasan Mehrani Faezeh Mohammadi Oroojeh
author_sort	Sasan Mehrani
title	An Investigation on the Effect of the Bank Opacity on the Regulatory Forbearance
title_short	An Investigation on the Effect of the Bank Opacity on the Regulatory Forbearance
title_full	An Investigation on the Effect of the Bank Opacity on the Regulatory Forbearance
title_fullStr	An Investigation on the Effect of the Bank Opacity on the Regulatory Forbearance
title_full_unstemmed	An Investigation on the Effect of the Bank Opacity on the Regulatory Forbearance
title_sort	investigation on the effect of the bank opacity on the regulatory forbearance
publisher	University of Tehran
publishDate	2021
url	https://doaj.org/article/72cc755c2ff749afa057b0b6de93c16a
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An Investigation on the Effect of the Bank Opacity on the Regulatory Forbearance

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