Information Disclosure and Banking Sector Performance and Stability

Over the last decade, financial and capital markets have grown very rapidly and the markets have become more complex as a result of increased used of derivative securities. The recent subprime crisis has intensified the debate regarding the need for greater transparency. The purpose of this study is to contribute to this debate by examining the relationship between the quantity and quality of information disclosure regarding a bank\u27s securitization and credit derivative activities and the subsequent impact on bank performance and stability. The results show a significant relationship between the quality/quantity of disclosure and bank performance/stability. When information on securitization and credit derivative activities are disclosed on call reports and annual reports, performance/stability initially decreases. After a bank establishes certain setup, equipment, personnel and expertise on these activities, performance/stability starts to increase. The results also show that increases in disclosure/activity have an asymmetrical impact on bank performance and stability compared to decreases in disclosure bank performance measures are more sensitive to disclosure than stability measures the financial markets are more sensitive to changes in quantitative measures of disclosure/activity compared to qualitative measures and the financial markets show the greatest reaction to changes in the level of disclosure/activity by money center banks, followed by regional banks. The empirical results show that even when the level of financial activity had not changed, an increase in the detail describing the activity was followed by a significant reaction in the market. Examining the bank\u27s annual report, it appears that an extensive discussion of their securitization and credit derivatives activities tends to increase stock price volatility, Analysis of the effects of the quality of disclosure shows that low quality information decreases performance but has no effect on stability. Also, the results show that highly trans