Bank Opacity and Uninsured Depositor Monitoring

Abstract

This paper examines whether bank financial reporting opacity increases agency cost between bank managers and uninsured depositors. In particular, following calls from prior research, I investigate the effects of reporting opacity on this critical source of bank financing, which represents over $5 trillion at 2019. Using quarterly regulatory filings of federally-insured US commercial banks, I confirm a predicted negative association between uninsured deposits and larger delays in expected loss recognition, my proxy for reporting opacity. I also document expected cross-sectional variation, with this negative association accentuated for banks that are not too-big-to-fail (as these lack the implicit government guarantees of too-big-to-fail banks), and some evidence for banks that are not publicly-traded (which have lower overall reporting and disclosure quality relative to publicly-traded banks). The results are consistent with monitoring by uninsured depositors, such that stronger reporting transparency enables banks to attract higher levels of uninsured deposits.