•  
  • University of New South Wales
  • Macquarie University
  • The University of Sydney
  • University of Technology Sydney
  • Australian National University
  • The University of Melbourne
  • Capital Markets
  • Sirca
  • Commonwealth Bank
  • KPMG
  • King & Wood Mallesons
  • Macquarie
  • Australian Government - Treasury
  • New South Wales Goverment
 
 
 
 

CIFR Research Project

Do markets Pay Attention to Basel II Bank Risk Reports? - E138
Area of Interest: Financial Market Developments, Completed Projects  Lead Institution: UNSW Australia
Assessment Round: November 2012  Completion Date: 2015
Project Summary

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:

  • investigate whether market players benefit from the content of these risk reports.

  • investigate the impact of this mandatory disclosure on the design of bank debt.

 

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
Sydney (2014)
Queensland University of Technology
Brisbane (2014)
University of Cape Town
South Africa (2015)
Deutsche Bundesbank
Frankfurt, Germany (2015)
Kenyan School of Monetary Economics
Kenya (2015)
University of South Africa
 South Africa (2015)
Centre for Commercial Law and Financial Regulation
University of Reading
UK (2015)

Team Leader:
Associate Professor Jerry Parwada | Head of School of Banking and Finance, School of Banking and Finance, Business School, UNSW Australia
Researchers:
Professor Stefan Ruenzi | Head of the Chair of International Finance, Department of International Finance, University of Mannheim, Germany
Project Outputs:
 
 
 
 
 

 

The Centre for International Finance and Regulation (CIFR) represents a strategic link between academia, financial regulators, policy makers and industry, promoting financial sector vibrancy, resiliency and integrity, through leading research and education.

CIFR receives funding and support from the Commonwealth and NSW Governments, and its industry, university and research centre partners.

 

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