Featured Research

from universities, journals, and other organizations

Study quantifies costs when failed banks shun financial transparency

Date:
January 10, 2014
Source:
Massachusetts Institute of Technology
Summary:
A new study shows that more transparent accounting helps bidders, lowers costs when financial institutions fail.

A new study shows that more transparent accounting helps bidders, lowers costs when financial institutions fail.

Related Articles


Good accounting isn't just a hallmark of a well-run company: As a new study of the banking industry by an MIT professor shows, transparent financials help ensure stability when banks fail, and can even reduce costs for consumers or taxpayers when the government must oversee the bankruptcies of financial firms.

That has happened a lot lately, especially during the recent economic and financial crisis: From 2008 through 2010, the U.S. government was forced to act as the liquidating agent for more than 300 banks. But as MIT accounting professor Joao Granja shows in a newly published paper, the banks with better disclosure practices received higher bids for their assets, and regulators were able to conduct those liquidations more cheaply.

Overall, Granja finds, failing banks that had filed documents with the Securities and Exchange Commission (SEC) saw a 7.8 percentage point increase in the portion of their assets bought by other firms during bankruptcy auctions, since potential buyers were better able to understand and trust the value of the assets.

"More transparency reduces information asymmetry, making bidders more willing and more confident about bidding for these assets," says Granja, an assistant professor of accounting at the MIT Sloan School of Management.

Meanwhile, banks that regularly filed SEC documents were 4.5 percentage points less expensive for regulators to handle in bankruptcy than banks that had not filed such documents. When institutions are more transparent and better scrutinized by market participants, outside parties do not have to spend as much time digging around in an effort to reveal the true state of a financial institution's books.

"There is a social benefit here," Granja adds. "It's less costly for the regulators to close it, [costs that] ultimately might actually fall on the taxpayer."

Helping buyers and depositors

The paper, titled "The Relation between Bank Resolutions and Information Environment," appears in the latest issue of the Journal of Accounting Research, a peer-reviewed publication in the field.

Bank bankruptcies are administered by the Federal Deposit Insurance Corporation (FDIC), which is mandated by Congress with finding the least costly means of administering bankruptcy proceedings. Consumers, such as bank depositors, also have a strong interest in seeing bank failings run in a quick, orderly manner. When a bank fails, "They [the FDIC] immediately want to close it and sell it to a healthy bank, so that there's no unrest for the depositors," Granja notes.

But not all bankruptcies are alike. Banks are regulated by a variety of agencies, but those registered with the SEC, Granja contends in the paper, undertake "a sizeable increase in financial transparency," since they have to produce regular discussion and analysis of their activities in annual reports, and must file forms with every unscheduled but materially important event.

In conducting his study, Granja scrutinized the bankruptcy auctions for 322 banks that failed between Jan. 1, 2008, and Dec. 31, 2010. Sales of assets for troubled banks often happen in the last two weeks before a bank is set to close, and potential buyers have a relatively short timeframe, just a few days, to conduct due diligence. That means consistent past financial disclosure is all the more significant.

For this reason, as Granja found, an average 80 percent of the assets of banks not registered with the SEC sold at FDIC auctions, but 86 percent of assets sold among banks that had regularly filed SEC documents.

"When the failed bank was more transparent, bidders are willing to take on a higher percentage of the assets of the failed bank," Granja says.

Best practices for the next crisis

U.S. economic history reveals a series of waves of failing banks, a phenomenon that was pronounced in the 1980s, for instance, as well as the 2008 to 2010 period. Granja believes that studying best practices for bankruptcy proceedings can help smooth the financial waters in case another such wave roils the banking industry.

And while the FDIC's funding comes, in part, from fees banks pay, higher costs for the agency could be passed on to consumers, or in some circumstances could even require taxpayer assistance. Greater transparency by banks now could thus help insulate citizens from future costs.

"There might be [cause] for policy action to correct this, and for the regulators to require more transparency and disclosure on the part of the banks," Granja concludes.


Story Source:

The above story is based on materials provided by Massachusetts Institute of Technology. The original article was written by Peter Dizikes. Note: Materials may be edited for content and length.


Journal Reference:

  1. João Granja. The Relation Between Bank Resolutions and Information Environment: Evidence from the Auctions for Failed Banks. Journal of Accounting Research, 2013; 51 (5): 1031 DOI: 10.1111/1475-679X.12028

Cite This Page:

Massachusetts Institute of Technology. "Study quantifies costs when failed banks shun financial transparency." ScienceDaily. ScienceDaily, 10 January 2014. <www.sciencedaily.com/releases/2014/01/140110103524.htm>.
Massachusetts Institute of Technology. (2014, January 10). Study quantifies costs when failed banks shun financial transparency. ScienceDaily. Retrieved October 30, 2014 from www.sciencedaily.com/releases/2014/01/140110103524.htm
Massachusetts Institute of Technology. "Study quantifies costs when failed banks shun financial transparency." ScienceDaily. www.sciencedaily.com/releases/2014/01/140110103524.htm (accessed October 30, 2014).

Share This



More Computers & Math News

Thursday, October 30, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Mind-Controlled Prosthetic Arm Restores Amputee Dexterity

Mind-Controlled Prosthetic Arm Restores Amputee Dexterity

Reuters - Innovations Video Online (Oct. 29, 2014) — A Swedish amputee who became the first person to ever receive a brain controlled prosthetic arm is able to manipulate and handle delicate objects with an unprecedented level of dexterity. The device is connected directly to his bone, nerves and muscles, giving him the ability to control it with his thoughts. Matthew Stock reports. Video provided by Reuters
Powered by NewsLook.com
Robots Get Funky on the Dance Floor

Robots Get Funky on the Dance Floor

AP (Oct. 29, 2014) — Dancing, spinning and fighting robots are showing off their agility at "Robocomp" in Krakow. (Oct. 29) Video provided by AP
Powered by NewsLook.com
IBM Taps Into Twitter's Data With New Partnership

IBM Taps Into Twitter's Data With New Partnership

Newsy (Oct. 29, 2014) — The new partnership will allow IBM to access Twitter’s data and analytics to help IBM clients better understand their consumers. Video provided by Newsy
Powered by NewsLook.com
Google To Use Nanoparticles, Wearables To Detect Disease

Google To Use Nanoparticles, Wearables To Detect Disease

Newsy (Oct. 29, 2014) — Google X wants to improve modern medicine with nanoparticles and a wearable device. It's all an attempt to tackle disease detection and prevention. Video provided by Newsy
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
 
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:  

Breaking News:

Strange & Offbeat Stories

 

Space & Time

Matter & Energy

Computers & Math

In Other News

... from NewsDaily.com

Science News

Health News

    Environment News

    Technology News



    Save/Print:
    Share:  

    Free Subscriptions


    Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

    Get Social & Mobile


    Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

    Have Feedback?


    Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
    Mobile iPhone Android Web
    Follow Facebook Twitter Google+
    Subscribe RSS Feeds Email Newsletters
    Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins