Working Paper: CEPR ID: DP17024
Authors: Stefan Avdjiev; Maximilian Jager
Abstract: We investigate the patterns and implications of bank opacity in Europe using a rich bank-level data set. Employing a novel event study methodology, we document that public data releases by the European Banking Authority (EBA) on banks' exposures to individual countries and sectors contained information that was not previously priced by equity and CDS markets. We demonstrate that the degree of bank opacity varied considerably across bank nationalities and counterparty sectors – it was highest for European periphery banks' sovereign exposures and European core banks' private sector exposures. Furthermore, we document that underestimations of banks' credit risk by markets were associated with lower funding costs and higher wholesale borrowing (for all banks) as well as with greater risk taking and higher profitability (for European periphery banks).
Keywords: bank opacity; asymmetric information; event study; credit risk; asset markets
JEL Codes: F34; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public releases of new information on banks' exposures (G28) | decrease in CDS spreads (F65) |
| public releases of new information on banks' exposures (G28) | increase in stock prices (G10) |
| higher expected losses (G33) | increase in CDS spreads (F65) |
| higher expected losses (G33) | decrease in stock prices (G10) |
| underestimated credit risk (G21) | lower funding costs (G21) |
| underestimated credit risk (G21) | higher wholesale borrowing (H74) |
| periphery banks' underestimated credit risk (F65) | riskier lending practices (G21) |
| riskier lending practices (G21) | higher net interest margins (G21) |