DP17024 Bank opacity - patterns and implications

Author(s): Stefan Avdjiev, Maximilian Jager
Publication Date: February 2022
Keyword(s): Asset Markets, Asymmetric information, bank opacity, credit risk, event study
JEL(s): F34, G21, G28
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=17024

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 â?? 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).