Internal Ratings, Non-Performing Loans, and Bank Opacity: Evidence from Analysts’ Forecasts

73 Pages Posted: 24 Jan 2023 Last revised: 22 Jun 2023

See all articles by Brunella Bruno

Brunella Bruno

Bocconi University - Department of Finance

Immacolata Marino

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF)

Giacomo Nocera

Audencia Business School

Date Written: January 20, 2023

Abstract

We use a panel data set of large listed European banks to evaluate the effect of the usage of internal ratings-based (IRB) models on bank opacity. We find that a more intensive implementation of these models is associated with lower absolute forecast error and disagreement among analysts about bank earnings per share. The results are stronger in banks adopting the advanced version of IRB models. In these banks the negative effect of non-performing loans on bank transparency is mitigated. We deal with concerns regarding omitted variables and reverse causality using an instrumental variables approach. Our results are driven by the more in-depth disclosure of the credit risk exposures that follows the adoption of IRB models.

Keywords: Bank regulation, Basel II, risk-weighted assets, transparency

JEL Classification: G20, G21, G28

Suggested Citation

Bruno, Brunella and Marino, Immacolata and Nocera, Giacomo, Internal Ratings, Non-Performing Loans, and Bank Opacity: Evidence from Analysts’ Forecasts (January 20, 2023). BAFFI CAREFIN Centre Research Paper No. 195, Available at SSRN: https://ssrn.com/abstract=4331575 or http://dx.doi.org/10.2139/ssrn.4331575

Brunella Bruno (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Immacolata Marino

CSEF - University of Naples Federico II - Centre for Studies in Economics and Finance (CSEF) ( email )

Via Cintia
Complesso Monte S. Angelo
Naples, Naples 80126
Italy

Giacomo Nocera

Audencia Business School ( email )

8 route de la Jonelière, BP 31222
Nantes Cedex 3, Cedex 3 44312
France

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