Do risk disclosures enhance the efficacy of regulatory and supervisory frameworks in restricting banks’ risk-taking?

Abstract

This study examines the impact of stringent regulatory and supervisory frameworks, as well as enhanced risk disclosure practices, on banks’ risk-taking behavior. We analyze a sample of banks from twelve European countries (Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Netherlands, Poland, Spain, Sweden, and the United Kingdom) over the period from 2000 to 2020. Our findings demonstrate a significant decrease in banks’ inclination to engage in risky behavior when they are subjected to strict regulatory and supervisory frameworks, alongside increased disclosure of risk management practices. Moreover, the implementation of comprehensive risk disclosures, as a supplementary tool for banking regulation and supervision, effectively reduces banks’ tendency to engage in risky activities. The results of our study remain robust across various checks conducted for each hypothesis.