Opacity and risk-taking: Evidence from Norway

Jin Cao () and Ragnar Juelsrud

No 2020/12, Working Paper from Norges Bank

Abstract: This paper investigates how balance sheet opacity affects banks' risk-taking behavior. We measure bank balance sheet opacity according to two metrics: the ratio of available-for-sale (AFS) securities and the ratio of off-balance sheet items. We show that balance sheet opacity is positively correlated with realized bank risk. Specifically, banks with more AFS securities have lower realized risk, while banks with more off-balance sheet items have higher realized risk. The correlation between opacity and risk depends on both macroeconomic variables and bank characteristics. The positive relationship between bank opacity and bank risk is weaker for better capitalized banks and banks that are subject to more market discipline. The relationship is also weaker during periods of favorable market conditions. Motivated by this analysis, we then investigate how regulation affects bank opacity. We show that higher capital requirements reduce bank opacity and bank risk through a portfolio rebalancing channel.

Keywords: opacity; transparency; available-for-sale securities; off-balance sheet items; risktaking (search for similar items in EconPapers)
JEL-codes: G21 G23 G28 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020-10-07
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://hdl.handle.net/11250/2690085

Related works:
Journal Article: Opacity and risk-taking: Evidence from Norway (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2020_12

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