Disclosure regulation in the commercial banking industry: Lessons from the National Banking era

I exploit temporal and spatial variation in the adoption of disclosure regulation across the state banking systems of the National Banking era to examine how these regulations affect the development and stability of commercial banks. I find strong evidence that requirements to report financial statements in local newspapers promoted the stability and development of the state banking system, but little evidence that periodic on-site examinations incrementally contributed to these outcomes. These results suggest disclosure regulation mitigates agency conflicts between bankers and depositors by facilitating private monitoring. I also analyze the political economy of disclosure regulation using evidence from the popular votes on the 1888 Illinois and Michigan referenda. Counties in which large agricultural landowners and private banks were particularly strong were less likely to vote favorably for the enactment of these laws. These findings suggest incumbent groups oppose laws that promote disclosure and monitoring, because their passage would foster financial development and threaten their private interests.