XXV Edition

1-2 December 2016"

Bank Opacity, Competition and Risk-Taking: Evidence from Analysts' Forecasts

Fosu Samuel, University of Birmingham
Ntim Collins G., University of Huddersfield
Coffie William, University of Ghana
Murinde Victor, University of Birmingham

We investigate the impact of banking system opacity on insolvency risks using a large sample of US bank holding companies for the period 1995 to 2013. We depart from the existing literature which considers opacity in terms of banks’ stock liquidity, derivatives usage, country-level and accounting-based measures; rather, we argue that analysts' forecasts are highly informative and provide an alternative proxy for opacity that emphasises the precision of both private and public information. We uncover three new findings. Firstly, we find that opacity, measured by analysts' forecast error and dispersion, increases risk taking among banks. Secondly, we show that the relationship between opacity and bank risk-taking is accentuated by the degree of banking market competition. Thirdly, our evidence suggests that the bank business model moderates the risk-taking incentives of opaque banks, but only marginally. These findings are robust to alternative measures of opacity and bank risk.

Area: Banking

Keywords: Bank holding companies; Opacity; Competition; Business model; Risk-taking

Paper file

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