No. 172: Bank Credit Response to Corporate Disclosure Regulation

This study examines the impact of corporate disclosure regulation on the banking sector, focusing on its influence on the equilibrium level of bank credit across different banking groups. Utilizing supervisory bank-borrower-level data and a corporate disclosure enforcement reform in Germany, I find that the effects of corporate disclosure regulation vary significantly across banking groups, as local banks experience positive outcomes, while national banks encounter adverse effects. Evidence suggests that the regulation mitigates information asymmetries between banks and other capital providers, thereby fostering competition among them and prompting regulated borrowers to shift from bank loans to other sources of financing, with this effect being more pronounced for national banks. Additional analysis indicates that regulated borrowers are more likely to issue corporate bonds post-enforcement compared to other borrowers. However, unlike national banks, local banks demonstrate an increased engagement with unregulated borrowers as competition for regulated borrowers intensifies following the regulation, reinforcing the notion that these local banks possess a comparative advantage in gathering private and soft information. Overall, these findings underscore the significant role of firm-level disclosure regulation, distinct from bank-specific regulatory frameworks, in reshaping the market structure of the banking sector.