Who's afraid of transparency?

The EU remains a laggard in banking transparency, according to a study led by Mark Hallerberg.

By Mark Hallerberg, Christopher Gandrud and Nicolas Véron

Bank supervisors in the European Union have shown no improvement in publishing data on the institutions they supervise. In fact, supervisory transparency has deteriorated since our 2013 survey of bank data disclosures (Gandrud and Hallerberg 2014).

At the European level, the inception of the euro area banking union is a major change of policy regime since our previous survey, but it has not yet made enough of a difference in supervisory transparency. Also at the European level but predating banking union, the European Banking Authority (EBA) has continued to make important improvements in supervisory transparency. But its efforts are insufficiently institutionalized and do not cover the full spectrum of banks in the European Union.

This lack of transparency is worrying because further successful integration of the EU financial sector requires financial market participants and the public to be able to access information on banks’ activities and health across borders. Some jurisdictions provide much more detailed, regular, and frequent information. In the United States, for example, roughly 8,200 banks are required to make quarterly “call reports” that have data on the respective bank’s earnings, balance sheet, asset quality, liquidity and capital. A federal agency, the Federal Financial Institutions Examinations Council (FFIEC), makes this information available online, generally the day after it receives it.

Supervisory authorities, including the European Central Bank (ECB) in its new capacity as euro area financial supervisor, should dramatically step up their efforts to provide the public with more information about Europe’s massive banking sector.

Transparency at the national level

In our 2013 survey we found that only 11 of the European Union’s 28 member states, and only 5 of 19 banking union countries, made any such information easily available on the internet (Gandrud and Hallerberg 2014). These data were generally fairly simple balance sheet information, such as total assets and capital. Even in Spain, the country with the most comprehensive data, the level of detail was low. It did not include information on nonperforming loans, a crucial metric for determining a bank’s health.

In early 2016, we find the picture has actually worsened. Now only nine of the 28 EU member states, and four of the 19 banking union countries, make any individual bank data easily available online. In four of the five countries where we found any changes to data transparency, the situation deteriorated. In France and Luxembourg, data reported was not only unavailable but also now confidential. This classification could make it even harder for the public and potentially other supervisors to access bank data. In Estonia, the data found in the 2013 survey are still available but have not been updated, suggesting that basic transparency measures were not institutionalized. The Czech Republic has had the largest shift towards opacity: Data that were once available are now no longer so. The only limited improvement we found is in Ireland, where the data, while still unavailable, are no longer classified as confidential. Table 1 presents the full results of the updated survey, highlighting the changes since our previous survey.

Transparency at the EU level

Financial supervisory data transparency at the EU level has moved in a more positive direction but does not offset the shortcomings at the national level. EU institutions have conducted ad hoc transparency exercises and bank balance sheet reviews and published many of the results. However, transparency measures have not been institutionalized, and so could be easily discontinued, and they cover only a subset of Europe’s banks.

ECB Banking Supervision has regularly updated its list of supervised entities and occasionally released data from exercises such as the 2014 and 2015 Comprehensive Assessments, but it does not regularly publish quantitative data about euro area banks beyond a highly imprecise indication of balance sheet size. The 2014 Comprehensive Assessment covered 130 banks; the 2015 one was of nine additional banks; and another assessment is planned for 2016. The ECB also publishes biannual consolidated banking data for all EU banks broken down by country, domestic vs. foreign ownership, and bank size, but this information is not available at the bank level and is only presented as national aggregates.

The EBA, which covers all 28 member states, published results of a transparency exercise in December 2013, EU-wide stress tests in October 2014, and a follow-up transparency exercise in November 2015. These covered, respectively, only 64, 123, and 105 banks (of which one was from Norway and the rest headquartered in the European Union). The vast majority of Europe’s more than 3,500 banks, representing perhaps a quarter of total assets, have been left out. The transparency exercise is valuable but should be further institutionalized, and its frequency should increase so that at least some of the data would be released annually or even quarterly.

Supervisory transparency matters

Legitimate questions have been raised about the extent to which supervisors should release the information that they collect about individual banks. There are concerns that too much transparency may reveal trade secrets or that markets may punish banks that turn out to have weaker books than expected so much that bank failures become more likely, thus increasing financial instability.

Yet, even with these concerns in mind, there are compelling reasons why supervisory transparency for individual banks should lead to more financial stability, not less. Bankers will want to prevent adverse market reactions if they know that more data about them will be made public. Better transparency may facilitate contestability and mergers, especially cross-border mergers, where information asymmetries are high. Data transparency allows parliaments and the public to better judge supervisors’ performance, which means that supervisors expect more scrutiny and so should act more responsibly. These benefits of transparency are well established in the relevant literature. For example, Nier (2005) finds that more transparent banks are less likely to experience a crisis, while Tadesse (2006) reports that countries with more extensive bank disclosure requirements are less likely to experience a systemic banking crisis.

Table 1: Full Update of EU Member State Financial Supervisory Data Transparency Survey from Gandrud and Hallerberg (2014)

References

Gandrud, Christopher, and Mark Hallerberg (2014), “Supervisory Transparency in the European Banking Union”, Bruegel Policy Contribution 2014/01

Nier, Erlend (2005) ‘Bank Stability and Transparency’. Journal of Financial Stability, Vol. 1, No. 3, pp. 342–54.

Tadesse, Solomon (2006) ‘The Economic Value of Regulated Disclosure: Evidence from the Banking Sector’. Journal of Accounting and Public Policy, Vol. 25, pp. 32–70.

The authors are grateful to Marina Pavlova for excellent research assistance.

This article has been published first by the Peterson Institute for International Economics and in a longer version by Bruegel.