The evaluation of the impact of risk disclosure and bank-level stability: an empirical study of European and US banks

This thesis examines risk disclosure and bank-level stability of US and European banks. More specifically, four main topics have been empirically examined: the impact of risk disclosure following the implementation of Basel II pillar III on bank-level stability; the response of banks’ level of risk disclosure to the enforcement actions taken by regulators; the association between risk disclosure and bank managers’ risk-shifting activity (cash transfer); and, finally, the benefits of a higher level of disclosure and depositors’ consequent disciplinary activity for lower levels of disclosure. Using a self-constructed disclosure index following Pillar III of Basel II’s disclosure requirement guidance, as well as implementing Nier and Baumann’s (2006) disclosure index this thesis finds that risk disclosure followed by implementation of Basel II Pillar III has improved bank-level stability. This thesis further finds that banks subject to enforcement action lower their risk disclosure level, whereas non-sanctioned but close to sanctioned banks (measured using Mahalanobis distance) increase their disclosure level when their close competitors are subjected to enforcement action. This thesis also confirms that lower-disclosing banks have a higher probability that they have already transferred some cash from depositors to shareholders hence transferred some risk from shareholders to depositors. Moreover, it has been also found that banks can benefit from lower costs of deposit (i.e. interest rates paid to depositors) if the risk disclosure level is high, and depositors will affect banks through a reduction in the deposit growth rate when the risk disclosure level is lower (i.e presence of depositors’ discipline).