The Basel II and III accords require the public disclosure of bank regulatory information under the Pillar 3, or market discipline, framework on a semi-annual basis. The new information details bank risk exposures and management strategies, capital adequacy and remuneration practices to enhance market discipline through transparency.
The research aimed to:
The research found significant differences in:
the frequency of the bank risk reporting regime in Australia compared to Europe.
the respective sharemarket responses to the risk reports of domestic and European banks.
the sharemarket significance of risk measures.
Furthermore, the study finds that capital and risk reporting to the market enhances the informational advantage of bank equity analysts. It is found that the effect of analyst recommendations on stock prices has become more pronounced. Despite some evidence that the information content of earnings forecasts diminishes in the Pillar 3 reporting period, forecast accuracy itself is found to improve.
The research provided evidence that the Pillar 3 reporting regime provides investors with meaningful information and improves the information environment of bank stocks. This is supported by an average reduction of 19% in time-weighted bid-ask spreads (TWBAS) after its implementation, except in Singapore and South Africa. The spread reduction reflects a highly significant decrease in information asymmetry and a corresponding improvement in the liquidity of bank stocks as a result of the introduction of this enhancement to market discipline.
The study is the first to investigate whether the market discipline of a country influences the behavior of overseas debt issuers. The research finds that Pillar 3 reporting reduces the propensity of banks to raise debt capital abroad, a finding that is attenuated when the banks are domiciled in countries with superior creditor rights protections. Pillar 3 reporting increases the imposition of covenants in Yankee bonds, particularly for banks domiciled in jurisdictions with weaker debt law enforcement standards and stronger shareholder rights.
This research has been presented at:
UNSW Blackrock Finance Industry Roundtable
Queensland University of Technology
University of Cape Town
South Africa (2015)
Frankfurt, Germany (2015)
Kenyan School of Monetary Economics
University of South Africa
South Africa (2015)
Centre for Commercial Law and Financial Regulation
University of Reading