Reliance on External Assurance in Regulatory Monitoring
利用一项监管变化，研究银行监管者在不再依赖外部审计时是否变得更严格，发现银行报告更多问题资产，监管检查时间增加，表明第三方保证不能完全替代直接监管。
ABSTRACT We exploit a regulatory change to examine whether bank regulator strictness is affected when regulators no longer rely on external assurance. In the absence of external assurance, we find that banks report higher nonaccrual loans, higher troubled debt restructurings, and both a timelier loan loss provision and higher quality allowance for loan loss reserve. Further, regulators spend more days performing targeted bank examinations for banks affected by the regulatory change. We do not find evidence of operational deterioration, but rather the findings are consistent with increased regulator strictness over the reporting of problem assets, particularly during targeted examinations. Overall, our results suggest that regulators become stricter when they can no longer rely on the work of external auditors and that third-party assurance is an imperfect substitute for direct regulatory monitoring. Data Availability: Bank regulatory rating and examination dates are confidential and were obtained from the Federal Reserve Bank of St. Louis. All other data are available from the public sources cited in the text. JEL Classifications: G21; G28; M42.