Financial Statements and Reality: Do Troubled Banks Tell All? - Economic and Financial Review, Third Quarter, 2000 - Dallas Fed

30 Efforts requiring banks to divulge information on their financial condition have a long history. In the early 1800s, some states required banks to file reports of condition with the governor or legislature, arguing the state was a shareholder in the banks and therefore entitled to the information (Robertson 1995). However, the reports contained only broad breakdowns of assets and liabilities and no information bank directors did not wish to disclose. In 1869, Congress empowered the comptroller of the currency to “call” for a full statement of condition from national banks several times a year. Regulators have since made many changes to the resulting call report, but its purpose remains the same— to provide timely information regarding the condition of banks. The modern call report, or Report of Condition and Income, is filed quarterly by all banks and contains hundreds of accounting items that regulators and private analysts use to characterize the financial condition of both individual banks and the industry. Call reports now include detailed measures of assets, liabilities, revenues, expenses, and off-balance-sheet activity. The level of detail is somewhat greater for large banks than for small ones, but even small banks file an extensive report. This article analyzes call report revisions to assess the extent to which regulatory exams promote accurate data. If the loan-loss accounting in call reports is widely used to measure loan quality, the findings support the view that exams are important in the public dissemination of accurate information on banks’ financial condition.