Does greater transparency discipline the loan loss provisioning of privately held banks?
We investigate whether privately held banks change their loan loss provisioning practice once they are required to disclose the accounting choice. We study a change in disclosure regulation under German banking law that introduces mandatory disclosures of loan loss provisions. Using proprietary data provided by the national bank supervisor, we are able to observe the provisioning practice before and after the adoption of the regulation. Our findings suggest that bank managers use loan loss provisions to a lesser extent for income smoothing with the provisions becoming more informative of future loan losses in the post-disclosure period. The change comes in the absence of capital market pressure and points to the role of depositors in the monitoring of bank managers. We use geographic variation in depositor characteristics and show that the change is associated with the potential strength of depositor discipline in the local banking market.