European Global Systemically Important Banks, Banking Supervisory Power, and Audit Fees

Abstract

In 2011, the Financial Stability Board designated the world’s largest banks as Global Systemically Important Banks (GSIBs), subjecting them to increased supervision and additional capital requirements, which likely altered their auditors’ engagement risk and effort. In this study, we examine the implications of the GSIB designation for the audit fees of European banks, finding that the designation is accompanied by a 12.8% increase in audit fees for GSIBs relative to non-GSIBs. The increase in audit fees is mainly driven by GSIBs from countries with less powerful banking supervisors, with these GSIBs exhibiting improvements in the quality of their financial reporting. Overall, our findings suggest that although the GSIB designation involves some significant costs (i.e., higher audit fees), it offers some benefits (i.e., higher financial reporting quality), and these benefits mainly occur in countries with less powerful banking supervisors.