- Key insight: Banks will still file quarterly reports to their regulators, even if the SEC only requires them to release earnings reports every six months.
- What's at stake: Some academics argue that less transparency from publicly traded banks could boost financial stability. Others say such a shift would hurt capital markets.
- Forward look: The SEC's proposal could be made public as soon as next month, the Wall Street Journal reported.
Publicly traded banks may soon be able to end certain quarterly regulatory disclosures, shifting to semiannual reports, in what would be a major revamp of how those institutions communicate with investors.
The possibility that the Securities and Exchange Commission will revise its rules has added urgency to a long-running debate: Will less frequent financial reporting incentivize longer-term strategic planning by banks and strengthen the financial system, as proponents argue? Or will it reduce market discipline, as detractors contend?
Some academics contend that the contemplated change could lead to less risk-taking by banks and more stable deposit franchises, without posing a threat to financial stability. But others believe the downsides of less transparency may outweigh the benefits, especially if there's also a downturn in regulatory oversight.
"If bank stock prices go down because people think banks have gotten riskier, or that they're economically worse off than their regulatory capital portrays, then you can have bad things happen," said Stephen Ryan, an accounting professor at New York University's Stern School of Business.
"You can have bank runs, like we saw with SVB and others," he said, referring to the abrupt failure of Silicon Valley Bank in 2023. "Or you can have difficulty raising financing."
An SEC spokesperson declined American Banker's request for comment.
Banks are in a somewhat different position than other public companies, because no matter what actions the SEC takes, they must still submit quarterly financial statements to banking regulators, including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency.
However, the SEC requires the reporting of certain information on a quarterly basis that bank regulators don't. Banks must share the fair value of financial instruments like loans and long-term debt, along with certain risk-sensitivity disclosures, in their SEC filings. The agency also requires banks to log certain loss contingencies that may not have to be recognized in reports to other regulators.
Disclosure requirements vary across the world. While companies in the European Union, Great Britain and Australia primarily report semiannually, quarterly reports are the standard in India and Japan.
A switch to semiannual reporting would likely be welcomed by most bank CEOs, whose firms would save substantial time and money by preparing earnings reports less frequently. And there could be other benefits. Former Morgan Stanley CEO James Gorman and JPMorganChase CEO Jamie Dimon have both spoken out about the negative pressures on bankers as a result of investors' short-term expectations.
In a similar vein, Rahul Vashishtha, an accounting professor at Duke University's Fuqua School of Business, argues that reducing short-term pressure on companies by ending quarterly earnings reporting could increase financial stability.
Vashishtha's research has shown that more frequent reporting can lead to a deterioration of long-term decision-making, which can hurt companies' investment strategies, productivity and performance, he said.
While that particular study didn't include banks, he thinks financial institutions, like other companies, are also subject to market forces that may increase risk-taking.
"The easiest way in the banking industry to boost your short-term earnings is by relaxing lending standards," Vashishtha told American Banker. "So you can accelerate your earnings by loosening your standards. … And if you under-report your loan-loss provisions, you can show much higher profits now, and the costs will show up a little bit later."
Vashishtha's bank-specific research has linked additional transparency with deposit volatility, he said. Signals that banks' asset values are fluctuating can drive clients with uninsured deposits to move their money around, he said.
Ryan, of NYU's Stern School, is more skeptical of the benefits of allowing semiannual reporting. Transparency helps the capital markets run more efficiently and levels the playing field in the industry, especially during economic downturns, he said.
"Timeliness becomes particularly important when economic conditions change," Ryan told American Banker. "If you're in a boom period, and you're moving toward some kind of bust period, then that's when the timely information is most important."
It's also possible that a decrease in the frequency of reporting will lead to misunderstandings in the market, and to stock prices that are less representative of banks' underlying fundamentals.
Vashishtha said there are trade-offs involved, but the downsides of less frequent reporting don't trump the potential benefits.
Bank regulators haven't shared any plans to reduce the frequency of their mandated quarterly disclosures, but Ryan noted that Trump-era bank regulators have made moves to roll back certain rules and guidelines.
"My general sense is that what's happening at the SEC has parallels to what's happening in bank regulation," Ryan said. "Certain regulations are getting weakened in banking. … So I think it's entirely possible that you might see bank regulatory filings also changing for ideological reasons, because the pressures on bank regulators and the SEC are not unrelated."
Vashishtha said he thinks those agencies will still be capable of managing risks to the industry with the information available to them. But if there were a dramatic decrease in the regulators' functionality, and banks weren't required to report information as often, then the level of risk could shift, he noted.
"What do you do in a world when you cannot perfectly rely on regulators?" he said. "I think that's where the answer to me becomes very, very tricky. If market discipline is what's keeping banks' possible risk-taking activities in check, it's a possibility that discipline may go down."
