Abstract
This paper provides evidence on the impact of European Banking Union (BU) and the associated Single Supervisory Mechanism (SSM) on the risk disclosure practices of European banks. The onset of BU and the associated rules are considered as an exogenous shock that provides the setting for a natural experiment to analyze the effects of the new supervisory arrangements on bank risk disclosure practices. A Difference-in-Differences approach is adopted, building evidence from the disclosure practices of systemically important banks supervised by the European Central Bank (ECB) and other banks supervised by national regulators over the period 2012–2017. The main findings are that bank risk disclosure increased overall following BU but there was a weakening of disclosure by SSM-supervised banks relative to banks supervised by national authorities. We also find that the overall positive effect of the BU on bank disclosure is stronger for less profitable banks and in the most troubled economies of the Eurozone (GIPSI countries), while the negative effect on centrally supervised banks is stronger if bank CEOs act also as chairmen (CEO duality). We interpret these findings in light of the fact that the new institutional arrangements for bank supervision under which the ECB relies on local supervisors to collect the information necessary to act gives rise to inefficiencies with respect to the speed and completeness of the information flow between SSM supervised banks and the ECB, which are reflected in bank disclosure practices.
Highlights
This paper aims to investigate the effects that the change in banking supervision and the associated rules of the Banking Union (BU) in Europe has had on the disclosure practices of banks
We find that the overall positive effect of the BU on bank disclosure is stronger for less profitable banks and in the most troubled economies of the Eurozone (GIPSI countries), while the negative effect on Supervisory Mechanism (SSM) supervised banks is stronger in banks where the CEO is the chairman (CEO duality)
This paper investigated the impact of BU on bank risk disclosure in a sample of 225 European banks, 75 of which were supervised under the SSM once BU was introduced
Summary
This paper aims to investigate the effects that the change in banking supervision and the associated rules of the Banking Union (BU) in Europe has had on the disclosure practices of banks. Banks have considerable discretion in deciding on the information to be disclosed, which means that voluntary disclosures may not necessarily generate optimal outcomes. The literature shows that supervisors have diverging interests when the discharge of supervisory duties affects economies asymmetrically. This may be the case, for example, when the affiliates of a cross-border banking group are of diverging importance for their respective national financial markets (e.g., Holthausen and Rønde 2004; Bolton and Oehmke 2016). In the context of European BU, the potentially diverging interests of supervisors could have important implications as they could result in suboptimal information sharing and cooperation between the European Central Bank and the national bank regulators (see, for example, Carletti, et al 2015, 2021)
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