Using data for banks from 65 countries for the period 2001–2013, we investigate the impact of bank regulation and supervision on individual banks’ systemic risk. Our cross-country empirical findings show that bank activity restriction, initial capital stringency and prompt corrective action are all positively related to systemic risk, measured by Marginal Expected Shortfall. We use the staggered timing of the implementation of Basel II regulation across countries as an exogenous event and use latitude for instrumental variable analysis to alleviate the endogeneity concern. Our results also hold for various robustness tests. We further find that the level of equity banks can alleviate such effect, while bank size is likely to enhance the effect, supporting our conjecture that the impact of bank regulation and supervision on systemic risk is through bank’s capital shortfall. Our results do not argue against bank regulation, but rather focus on the design and implementation of regulation.

Earnings management has long been one of the main concerns in accounting and management literature, and the extent to which corporate governance mechanisms can discipline management behaviour and prevent earnings management has attracted increasing interest among policy makers and academic researchers. Differing from previous corporate governance literature that focuses mainly on the board and auditors, we explore the role of creditors in corporate governance. In particular, we examine the effect of bank intervention on earnings management via the lens of debt covenant violations, where control rights are transferred to creditors (banks). Using a Difference-in-Difference approach, we find that firms reduce both their accruals-based and real earnings management following debt covenant violations. The negative effect on earnings management is more prominent when banks possess greater bargaining and monitoring power and when firms are more financially constrained. By identifying a specific channel through which debt providers influence corporate financial reporting, our findings suggest that creditors can play an important role in governing organisations and disciplining management behaviour.