Bank Opacity and Systemic Risk

Abstract

This paper examines the impact of bank opacity on European financial stability. Based on a panel dataset of capital market-oriented European banks covering the period 2002-2018, it can be shown that bank opacity has a significant influence on the institution-specific contribution to the ∆Conditional Value at Risk and Marginal Expected Shortfall. The policies introduced by accounting standard setters and regulators for the risk disclosure of banks have a positive impact on the mitigation of bank opacity and reducing systemic risk. Both the risk reporting in accordance with IFRS 7 and the measures introduced by the Basel Committee in the form of the Basel Pillar 3 Regulation lead to an increase in transparency (reduction of Bank Opacity) and thus to an improvement in financial market stability. The results are robust, both by using alternative opacity measures and by using dynamic panel data models (GMM) to control for endogeneity.