European Banking Union and bank risk disclosure: the effects of the Single Supervisory Mechanism

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.

Bank Risk Literature (1978–2022): A Bibliometric Analysis and Research Front Mapping

“…Reference [36] finds an increase in bank risk disclosure after the establishment of the European Banking Union, while banks subject to the Single Supervisory Mechanism disclosed bank risk less than their counterparts subject to national supervision. According to ref.…”

“…Moreover, it has been discovered that the BU's beneficial impact on bank disclosure is more significant for less profitable banks and the most distressed economies of the Eurozone (GIPSI nations). Still, the BU's negative effect on centrally overseen banks is more substantial if bank CEOs also operate as chairmen (CEO duality) [36]. Local supervisors have specific interests related to the area under their supervision that might be damaging to system-wide financial stability, whereas a central supervisory body would prioritize the stability and welfare of the whole financial system above any local regions [143].…”

“…First, while choosing the quality, amount, and frequency of disclosures, banks assess the expenses against the possible advantage of decreased financing costs. Additionally, voluntary disclosures may not always result in the best outcomes since banks have many ways of determining what information to disclose [36].…”

A qualitative analysis of bank credit risk disclosure: Evidence from the Canadian and Italian banking sectors

“…Over the last decades, the literature on risk disclosure in the banking industry has gained popularity and momentum (Barakat & Hussainey, 2013; Frolov, 2006; Polizzi, 2022), and it currently offers various quantitative frameworks within the content analysis methodology (see Krippendorf, 2004) to examine different aspects of risk disclosures. These include the use of binary indicators to capture the presence or absence of specific pieces of disclosure (Nahar et al., 2016; Woods et al., 2008); the use of disclosure dictionaries to count the occurrences of specific words (Altunbaş et al., 2022; De Andrés et al., 2021; Farina et al., 2019; Loughran & McDonald, 2011; Samanta & Dugal, 2016); and the analysis of graphical reporting (Jones et al., 2018). Despite its relevance in providing an in‐depth analysis of different aspects of banking disclosures, qualitative content analysis is not widely employed within this literature, and outside of a few exceptions including Höring and Gründl (2011) and Scannella and Polizzi (2018, 2021), qualitative content analysis has rarely been used to examine this topic.…”