The harmonization of lending standards within banks through mandated loan-level transparency

Jung Koo Kang, Maria Loumioti*, Regina Wittenberg-Moerman

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

7 Scopus citations

Abstract

We explore whether the introduction of transparent reporting rules increases credit standard harmonization within a bank. We exploit the new loan-level reporting rules imposed on banks that borrow from the European Central Bank using repurchase agreements collateralized by their asset-backed securities. We compare credit terms of similar mortgages issued by a bank across a country's regions and find that harmonization increases following the adoption of the new reporting rules. Learning and regulatory scrutiny constitute mechanisms underlying this economic effect. We also show that harmonization leads to more favorable lending terms to borrowers and higher loan quality for banks. Overall, these findings suggest that transparent reporting rules incentivize banks to improve their internal decision-making and thereby reduce regional divergence in their credit standards.

Original languageEnglish (US)
Article number101386
JournalJournal of Accounting and Economics
Volume72
Issue number1
DOIs
StatePublished - Aug 2021

Funding

An earlier version of this paper has been circulated under the title “Lifting the Banking Veil: Credit Standards' Harmonization through Lending Transparency.” We appreciate helpful comments from Michelle Hanlon (the Editor) and Stephen Ryan (the Reviewer) at the Journal of Accounting and Economics, an anonymous referee at the European Central Bank, participants at INSEAD Accounting Symposium, UIC Accounting Conference, Miami “Winter Warm-up” Accounting Conference, Tulane Accounting Conference and AAA Annual Meeting, and workshop participants at Bocconi University, Columbia University, Duke University, European Central Bank, Georgia State University, the Stockholm School of Economics, SMU/UTD joint workshop, UCLA, the University of Amsterdam, the University of Calgary, the University of Cyprus, the University of Utah, and the University of Southern California. The paper greatly benefited from discussions with analysts in the European DataWarehouse, credit managers in two large European banks and from the comments of Eric Allen, Thomas Bourveau, David Canmann, Elena Carletti, Jean-Edouard Colliard, Olivier Darmouni, Patricia Dechow, Mariassunta Giannetti, Umit Gurun, Victoria Ivashina, Urooj Khan, Tina Lang, Clive Lennox, Vivek Pandey, Stacey Ritter, Kenth Skogsvik, Andrew Sutherland, Sander van Triest, David Veenman, Hannes Wagner, Barrett Wheeler, Wanjia Zhao and Aner Zhou. Maria Loumioti acknowledges support by the Lamfalussy Fellowship Program sponsored by the ECB. Any views expressed herein are only those of the authors and do not necessarily represent the views of the ECB or the Eurosystem. Jung Koo Kang and Regina Wittenberg-Moerman acknowledge research support from the University of Southern California; Maria Loumioti acknowledges research support from the University of Texas at Dallas. All remaining errors are our own. An earlier version of this paper has been circulated under the title “Lifting the Banking Veil: Credit Standards' Harmonization through Lending Transparency.” We appreciate helpful comments from Michelle Hanlon (the Editor) and Stephen Ryan (the Reviewer) at the Journal of Accounting and Economics, an anonymous referee at the European Central Bank, participants at INSEAD Accounting Symposium, UIC Accounting Conference, Miami “Winter Warm-up” Accounting Conference, Tulane Accounting Conference and AAA Annual Meeting, and workshop participants at Bocconi University, Columbia University, Duke University, European Central Bank, Georgia State University, the Stockholm School of Economics, SMU/UTD joint workshop, UCLA, the University of Amsterdam, the University of Calgary, the University of Cyprus, the University of Utah, and the University of Southern California. The paper greatly benefited from discussions with analysts in the European DataWarehouse, credit managers in two large European banks and from the comments of Eric Allen, Thomas Bourveau, David Canmann, Elena Carletti, Jean-Edouard Colliard, Olivier Darmouni, Patricia Dechow, Mariassunta Giannetti, Umit Gurun, Victoria Ivashina, Urooj Khan, Tina Lang, Clive Lennox, Vivek Pandey, Stacey Ritter, Kenth Skogsvik, Andrew Sutherland, Sander van Triest, David Veenman, Hannes Wagner, Barrett Wheeler, Wanjia Zhao and Aner Zhou. Maria Loumioti acknowledges support by the Lamfalussy Fellowship Program sponsored by the ECB. Any views expressed herein are only those of the authors and do not necessarily represent the views of the ECB or the Eurosystem. Jung Koo Kang and Regina Wittenberg-Moerman acknowledge research support from the University of Southern California; Maria Loumioti acknowledges research support from the University of Texas at Dallas. All remaining errors are our own.

Keywords

  • Credit term harmonization
  • External and internal reporting
  • Learning
  • Regulatory scrutiny
  • Transparency

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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