Bank opacity, systemic risk and financial stability

This paper examines the impact of bank opacity on European financial stability. Based on a panel dataset of listed European banks covering the period 2002-2018, I find that bank opacity has a significant influence on the institution-specific contribution to the Delta Conditional Value at Risk and Marginal Expected Shortfall. The enforcement mechanism and the policies introduced by accounting standard setters and regulators for the risk disclosure of banks have a positive impact on the reduction of systemic risk. Both the risk reporting in accordance with IFRS 7 and the measures introduced by the Basel Committee in the form of the Basel Pillar 3 regulation led to an increase in transparency and thus an improvement in financial market stability. As an independent enforcement mechanism, the country-specific strength of the external auditing profession plays a significant role in fostering stability. The results are robust, by using both alternative opacity measures and instrumentalvariable estimations (2SLS) to control for potential endogeneity.