The Impact of Supervisory Disclosure on the Supervisory Process : Will Bank Supervisors be Less Likely to Downgrade Banks?

An argument for refusing to publicly disclose supervisory ratings of the safety and soundness of banks rests on the claim that such disclosure will reduce supervisory effectiveness. Specifically, some argue that public disclosure of supervisory ratings will reduce the likelihood that bank supervisors take adverse, but deserved, actions against a bank such as a rating downgrade. This argument has not been subject to an empirical investigation. We provide the first test of this claim by examining if and how rating downgrades and upgrades changed when supervisors altered their policies and began disclosing ratings to bank management. If supervisors were more reluctant to alter ratings because of this change in disclosure policy, then it is reasonable to believe that disclosing ratings to the public—the ultimate goal of many proposals--would have as large or a larger effect. After controlling for bank-specific and standard economic factors, we find that more expansive disclosure did not make downgrades less likely. While such results are insufficient by themselves to justify release of bank supervisory data to the public, they are a necessary condition for enacting such a policy