The effectiveness of regulation depends not only on the written rules, but also on how regulators and the firms they regulate enforce and adhere to these rules.

We exploit the fact that banks are subject to quasi-identical risk disclosure rules under securities laws (IFRS 7) and banking regulation (Pillar 3 of the Basel II accord), but that different regulators enforce these rules at different points in time. We find that banks substantially increase their risk disclosures upon the adoption of Pillar 3 even if they had to comply with the same requirements under IFRS 7 beforehand.

The increase is larger in countries where the banking regulator has more powers and resources and is less involved in the general oversight of securities markets. It is also larger for banks most likely to attract regulatory scrutiny from the banking supervisor due to higher distress risk.

The improved risk disclosures translate into higher market liquidity around Pillar 3 but not around IFRS 7. The results indicate that the success of regulation depends on the fit between regulator and regulatee and that having multiple regulators may lead to inconsistent implementation and enforcement of the same rules.