Internal Ratings, Non-Performing Loans, and Bank Opacity: Evidence from Analysts’ Forecasts

Brunella Bruno, Immacolata Marino and Giacomo Nocera

No 23195, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: We use a panel data set of large listed European banks to evaluate the effect of the usage of internal ratings-based (IRB) models on bank opacity. We find that a more intensive implementation of these models is associated with lower absolute forecast error and disagreement among analysts about bank earnings per share. The results are stronger in banks adopting the advanced version of IRB models. In these banks the negative effect of non-performing loans on bank transparency is mitigated. We deal with concerns regarding omitted variables and reverse causality using an instrumental variables approach. Our results are driven by the more in-depth disclosure of the credit risk exposures that follows the adoption of IRB models.

Keywords: Bank regulation; Basel II; risk-weighted assets; transparency (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Pages: 73
Date: 2023
New Economics Papers: this item is included in nep-eec and nep-rmg
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