Transparently rewarding

Greater transparency and richer and more robust flows of information about the banking system have been central to the official response to the financial crisis.

Clear, accessible and reliable data, it has been said, will help avert any repetition of the turmoil that followed the 2007 credit crunch and led to banks being bailed out by taxpayers.

In short, fuller disclosure should make the banking system work better for society and the economy as a whole. That it may also help it to work better for the banks themselves is a notion heard rather less frequently. Indeed, in some quarters it is hotly contested, not least on the other side of the Atlantic.

Yet in three critical areas, our research indicates that increased transparency and disclosure have been effective - not only for the benefit of banks but also for the borrowers and, potentially, the economic system.

Put simply, these three areas comprise

• Increased frequency of mandatory financial reporting by banks;
• Compulsory sharing of credit information by banks and other lenders; and
• Mandatory disclosure by banks of highly granular lending information.

We found that banks that switch to quarterly financial reporting see a marked drop in the number of non-performing loans and enjoy lower funding costs. The extension of public credit registries, pooling information on borrowers and loans, has led to timelier provision for losses by the banks. And finally, the imposition on banks in the euro-zone of the so-called loan-level reporting initiative has allowed banks to raise capital more cheaply and to increase their lending, notably to small businesses.

These findings are, we suggest, of considerable importance to policymakers and financial practitioners alike. The imposition of strict new rules ought not be seen simply as a semi-punitive measure to “rein in the banks” but can have creative and fruitful consequences for the banks themselves and conceivably many other stakeholders.

Look first at the effect of increasing the frequency of banks’ financial reporting. Quarterly reporting has been common in the US for nearly half a century, but has been adopted in Europe only more recently and in a less thoroughgoing manner. Further, European regulators This feature, however, makes Europe a highly suitable region for our research, which confined itself to banks that have switched either to or from quarterly reporting at least once during our sample period.