Pre-publication revisions of bank financial statements: a novel way to monitor banks?

Summary

Focus

A novel source of information regarding bank risk is pre-publication revisions of bank financial statements. Using a data set from the Central Bank of Brazil that covers a large number of banks over an extended period, we analyse the frequency and severity of revisions banks made before publishing their financial statements. We hypothesize that these revisions may contain forward-looking insights into bank risk, potentially offering early indicators of future problems. This study is unique in its focus on the flow of private information from banks to their supervisors, rather than public financial reporting.

Contribution

The paper distinguishes itself from previous research by focusing on the predictive power of pre-publication revisions for future bank risk, rather than immediate stock market reactions. It contributes to existing literature by shedding light on the relationship between regulatory reporting, private information flow and bank risk, offering insights that could enhance bank supervision and regulatory practices. Overall, the study underscores the importance of analysing the dynamics of bank financial reporting for early risk detection and regulatory oversight, with potential implications for financial stability and crisis prevention.

Findings

We show that 78% of all revisions occur before the publication of bank financial statements. We also find that these pre-publication revisions contain significant private information about future bank risk. Banks that revise their financial statements more frequently tend to exhibit higher risk levels in the future, as measured by such indicators as the bank's future average probability of default of its individual borrowers, CAMELS rating and Z-score. Additionally, speed and efficiency in financial statement submissions are linked to lower risk levels in subsequent months. Using machine learning techniques, we provide evidence on mechanisms through which revisions affect bank risk.

Abstract

We investigate whether pre-publication revisions of bank financial statements contain forward-looking information about bank risk. Using 7.4 million observations of monthly financial reports from all banks in Brazil during 2007-2019, we show that 78% of all revisions occur before the publication of these statements. The frequency, missing of reporting deadlines, and severity of revisions are positively related to future bank risk. Using machine learning techniques, we provide evidence on mechanisms through which revisions affect bank risk. Our findings suggest that private information about pre-publication revisions is useful for supervisors to monitor banks.

JEL classification: G21, G28, M41

Keywords: banks, bank performance, regulatory reporting quality, regulatory oversight, machine learning