Does Bank Transparency Matter?
Banks and Bank Systems, Volume 9, Issue 1, 75-93
19 Pages Posted: 22 Nov 2016
Date Written: 2014
Utilizing a sample of large US banks, this study examines the benefits of bank transparency using several key performance and stability measures over the 2001-2008 period. The market’s reactions to disclosure events are examined on a before-and-after comparison basis using a standard event study approach. Furthermore, the most and the least transparent banks are compared in terms of their relative performance and stability. In addition, a sample of both healthy and weak banks which are heavily involved in loan securitization and credit derivative activities are examined to identify the extent to which greater transparency stabilizes (destabilizes) and/or increases (decreases) bank performance. Finally, a logit model is used to see if bank disclosure played a role in the recent financial crisis. Surprisingly the results suggest that highly transparent banks are riskier than their less transparent peers. Specifically, greater disclosure regarding their securitization and credit derivative activities submitted on regulatory reports, as well as extensive coverage of credit derivatives in their annual report, increases the probability of an institution being classified as a “troubled” bank.
Keywords: banking transparency, banking disclosure, information disclosure, bank performance, bank stability, secu- ritization, credit derivatives, financial crisis
JEL Classification: G14, G21
Suggested Citation: Suggested Citation