Market Discipline and Banking System Transparency: Do We Need More Information?

Abstract: Enhancing banking system transparency – making banks disclose more information related to their financial position, risks and capital adequacy – is considered to be one of the urgent measures needed to stimulate market discipline. We attempt to discover the statistically significant relationship between market discipline and banking system transparency using the cross-country data (1990-2003). We consider both quantitative and price-based disciplining. Measuring banking system transparency we use Nier index as well as the index based on the results of the World Bank “Bank Regulation and Supervision” Surveys. We control for countries’ economic development level and their banking systems’ structure, regulation and stability. We found no statistically significant positive and stable influence of banking system transparency on the probability of market discipline being at force. This result implies that measures aimed to increase transparency, not being accompanied with requirements related to information availability and/or interpretability, may be not efficient in reaching the goal of market discipline stimulation.