Abstract
AbstractWe examine the impact of opacity on bank stability using a large US bank sample from 2001 to 2021. We observe that increasing opacity erodes bank stability. Our results indicate that the spillover effects of opacity induce greater price synchronicity and consequently increase systematic risk. These stability‐destroying effects of bank opacity are transferred via reduced profitability, deteriorated asset quality, and increased earnings volatility. The negative effects of opacity on bank stability are more pronounced in financially stronger and larger banks. They are muted in dividend‐paying banks. This study supports the concerns of prior researchers over too‐big‐to‐fail institutions and should be of interest to policymakers and other bank stakeholders.
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