What compliance commitments tell us about U.S. banks?

• Published date: 01 April 2023
• Author: Igor Semenenko
• Date: 01 April 2023
• DOI: http://doi.org/10.1002/jcaf.22595

Received: 21 March 2022 Revised: 17 September 2022 Accepted: 19 September 2022

DOI: 10.1002/jcaf.22595

RESEARCH ARTICLE

What compliance commitments tell us about U.S. banks?

Igor Semenenko

Acadia University,FC Manning School of

Business, Wolfville, NS, Canada

Correspondence

Igor Semenenko, Acadia University

FC Manning School of Business

15 University Ave., Wolfville

NS B4P 2R6, Canada.

Email: igor.semenenko@acadiau.ca

Abstract

This paper examines three levels of regulation and compliance imposed by

the Federal Reserve, the Securities and Exchange Commission (SEC), and

stock exchanges, on risk profile of banking institutions in the United States.

SEC-registered and exchanged-listed bank holding companies have more con-

centrated and lower quality loan portfolios; they grow faster throughacquisitions

and are more likely to execute M&A exitstrategy themselves. Also, bank holding

companies that commit to higher levels of compliance are better capitalized but

have lower return on equity capital. Lower profitability is partially compensated

with higher payout ratio, suggesting that regulatory frameworks to some extent

ameliorate agency issues.

Multi-tiered regulation of banking institutions yields a separating equilibrium,

in which banks choose level of compliance to match their business strategies.

Three-tiered regulatory framework enables market segmentation and matching

of capital providers with desired risk profile. Switch to higher levels of compli-

ance is accompanied by risk profile increase without a better risk-return tradeoff,

suggesting managerial agency cost explanation. SEC-compliant banks are likely

to migrate to exchanges or downshift to FDIC disclosure only. Both SEC and

exchange-listed banks are likely to execute growth-by-acquisitions but listed

bank holding companies are only marginally more likely to default, suggest-

ing more efficient risk-taking or reliance on government support when market

conditions decline. SEC compliance is the most volatile of three disclosure

regimes.

My study does not conclude that excessive regulation yields negative effects.

It does not address assessment of changes in systematic risk and externalities

focusing instead on firm-level effects. Finally, it suggests the need to regulate

the market for corporate control, which appears to be one major risk-taking

transmission mechanism in the US private banking market.

KEYWORDS

acquisitions, banks, disclosure, Sarbanes-Oxley

J Corp Account Finance. 2023;34:57–69. © 2022Wiley Periodicals LLC. 57wileyonlinelibrary.com/journal/jcaf