We employ the European Central Bank’s Loan-level Reporting Initiative as a shock to banks’ asset disclosures. We find that after the disclosure regulation, treatment banks raise more capital at cheaper rates and increase lending. Using novel survey data on small businesses, we also document that, in regimes with heightened bank disclosures, borrowers receive greater funding, conditional on their demand for credit. Furthermore, companies whose relationship banks provide asset disclosures start to borrow and invest more relative to firms from the same country and industry. Collectively, our inferences suggest that asset disclosures alleviate the capital market frictions that banks face and allow them to supply more credit to the real economy.
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The long title of the Dodd–Frank Wall Street Reform and Consumer Protection Act reads: “An Act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes” (emphasis added). Similarly, Pillar 3 of the Basel framework (2015) expanded disclosure requirements to enhance market discipline.
Consistent with this idea, Petersen and Rajan (1995) argue that banks with market power are in a better position to conduct intertemporal cross-subsidization in lending relationships and are thus more likely to lend to young and risky firms.
This issue has become particularly complicated in recent years, as most disclosure requirements have been bundled with additional rules, especially in the financial sector. To overcome this issue, prior work examines older settings, like the National Banking Era (Granja 2018).
The enforcement of these rules was stringent and conducted by national central banks. Further, banks that fail to comply with these new disclosure requirements would be excluded from the ECB repo operations. Data collection and administration are handled by the European DataWarehouse, which offers access to institutional investors, credit rating agencies, banks, and regulators.
Even though most, if not all, banks in the Eurozone benefit from the ECB financing in some way, banks self-select into pledging asset-backed securities as collateral. We note, however, that the pre-regulation trends in the lending of this group of banks and that of others appear to remain comparable. Furthermore, aggregate securitization and repo figures in the Eurozone suggest that banks did not opt out of the financing program to avoid providing asset disclosures. These observations mitigate lingering concerns about selection.
Unless stated otherwise, we use “SME,” “firm,” “borrower,” and “company” interchangeably.
We confirm that the outcome variable has similar trends for control and treatment groups pre-treatment. Further, our results are obtained after accounting for industry-country and industry-year fixed effects as well as controls for banking, macroeconomy, and SME characteristics.
Beatty and Liao’s (2011) focus on recessionary periods can be interpreted as identifying a time-series variation in the friction that our study sheds light on.
Dou et al. (2018) examine the real effects of FAS 166 and FAS 167 on banks’ loan-level mortgage approval and sale decisions. As do we, Dou et al. (2018) focus on the effect of increased disclosures of securitized assets. However, in contrast to our study, which examines the impact of increased loan-level disclosures, Dou et al. (2018) examine the impact of consolidation of securitization entities on mortgage approval and sale decisions.
For example, the French Banking Federation Response to the ECB’s discussion paper on the loan-level disclosure issue states that “bank sponsors are bound by most originators and sellers of the securitized assets purchased by its conduits not to disclose confidential information about the originators’ assets or customers or even the originators’ name or the fact that they entered into the transaction. Such information would be commercially sensitive for these originators and the application of public disclosure requirements would likely result in the removal of this efficient source of funding for many of these originators.” Similarly, EuroABS says in its discussion of this issue with the European Commission: “Our understanding is that the primary concern of asset originators is that, as a regulatory requirement of securitisation, they may be forced to disclose loan level information that would allow, perhaps in combination with other available datasets, identification of individual borrowers.” Thus a first-order concern is that external parties could link the disclosed data to individuals and then sell this information to competitors, permitting them not only to reverse-engineer scoring models and marketing strategies but also to directly target a bank’s best customers with great specificity and to loans that have a short remaining term. A competitor could then reach out to these individuals.
Increased transparency could also lead to inefficient bank runs driven by coordination failures among depositors and short-run creditors (Diamond and Dybvig 1983). When depositors care about not only how well-capitalized or solvent a bank is but also what other market participants believe about the bank’s financial condition, disclosures could impair market discipline (Gorton 2015; Holmstrom 2015). Morrison and White (2013) argue that increased transparency can cause reputational contagion where the failure of one bank causes creditors in other banks to lose confidence in the bank regulator’s competence. We do not examine contagion or bank runs in this study.
The asset classes that were under the 2013 wave of the LLD Initiative are residential and commercial mortgage-backed securities and SME-loan-backed securities. In 2014, the ECB extended the disclosure requirements to auto loans, credit cards, consumer credit, and leases. Since the latter group of securities are significantly smaller in economic magnitude, we focus only on the 2013 shock.
A recent view is that transparency can have a direct impact on deposit flows. Chen et al. (2018) document such an effect on both insured and uninsured deposits. We do not examine deposits in this study because of the lack of availability of data on insured and uninsured deposits. Accordingly, we remove deposit expense from our calculation of interest expense.
Unlike cost of debt, cost of equity issuances would have to be imputed under more restrictive assumptions. Measuring changes in firms’ costs of equity capital is highly debated. Studies use realized returns or dividend yields as proxies for the costs of capital. However, these proxies also capture changes in market expectations about firms’ future cash flows. Further, long time-series of realized returns are required to obtain an unbiased estimate of cost of equity capital (e.g., Stulz 1999). Implied cost of capital estimates based on analyst inputs are affected by model assumptions and highly limited in our sample of European banks.
Time-varying data on individual banks’ involvement in securitization is particularly sparse in the European setting, including Bankscope and our main data source, SNL. For this reason, we obtain this data from the European Banking Authority’s (EBA) regulatory disclosures from 2013. Since this information is available for a subset of banks, banks with a missing value are coded as having low securitization.
For further details, see https://www.ecb.europa.eu/stats/ecb_surveys/safe/html/index.en.html.
The contact letter used by ECB also highlights the survey’s purpose of understanding SME financing issues: https://www.ecb.europa.eu/stats/money/surveys/sme/shared/pdf/EN_SAFE_introductory_letter.pdf.
Potential responses to this question also include “Do not know,” “Application still pending,” and “Applied but refused because the cost was too high.” These alternatives, which constitute less than 10% of responses by loan applicants, are not used in the calculation of Funding upon application, because they are not associated with a clear loan application outcome.
One concern with loan application datasets is their inability to illuminate discouraged applicants, i.e., companies that have demand for credit but refrain from applying for a loan, due to a fear of rejection. The survey, however, does include a question on this subject, getting at the reasons for not applying for a loan. In untabulated tests, we regress the likelihood of refraining from making a loan application, due to a fear of rejection, on the same right-hand-side variables in Equation 2. We find statistically and economically significant negative coefficients on the difference-in-differences estimator, consistent with our main arguments.
The survey defines industry as manufacturing, construction, trade, services, or other.
Specifically, Post equals one for waves 9–14 of the survey and equals zero for waves 5–8, consistent with the widest measurement window we use in the paper (i.e., 2011–2015).
We get the extent of loan-level disclosures from the European DataWarehouse. We calculate the denominator, total loans in the system, using total loans (in millions of euros) from Bankscope (item 2001).
Amadeus Banker’s coverage and data availability allows us to conduct this analysis on French, Portuguese, and Spanish companies.
Since we observe Amadeus Financials data on an annual basis, the unit of observation is a firm-year. Regarding industry membership, Amadeus includes more granular information. Accordingly, firm industries are defined at the two-digit NAICS code level.
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We thank Paul Fischer (Editor), an anonymous reviewer, Brian Akins, Allen Berger, Darren Bernard, Gauri Bhat (discussant), Mark Bradshaw, Bob DeYoung, Yiwei Dou, Carlo Gallimberti, Chris Higson, Amy Hutton, Anya Kleymenova, Art Kraft, Alvis Lo, Maria Loumioti, Suheyla Ozyildirim, Darren Roulstone, Sugata Roychowdhury, Stephen Ryan, Catherine Schrand, Lakshmanan Shivakumar, Bobby Stoumbos, Irem Tuna, Alfred Wagenhofer, David Windisch, Regina Wittenberg-Moerman (discussant), Fatih Yilmaz, seminar participants at Boston College, Bilkent University, Cass Business School, the Central Bank of the Republic of Turkey, London Business School, the University of Amsterdam, the University of Graz, the University of Oxford, and conference participants at the 2016 Carnegie Mellon University Accounting Symposium, 2017 Chicago Financial Institutions Conference, and 2018 FARS Midyear Meetings at Austin for helpful comments and suggestions. Financial support from the LBS RAMD Fund is gratefully acknowledged. Ertan thanks the European DataWarehouse for the loan-level data and the European Central Bank for the data on the EC/ECB Survey on the Access to Finance of Enterprises. The views expressed in this study are those of the authors and do not reflect those of the European Central Bank, European Commission, European DataWarehouse, or any other organization.
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Balakrishnan, K., Ertan, A. Bank asset transparency and credit supply. Rev Account Stud 24, 1359–1391 (2019). https://doi.org/10.1007/s11142-019-09510-2
- Asset disclosures
- Credit supply
- Bank regulation
- Real effects