Does Bank Default Risk Increase with Information Asymmetry? Evidence from Europe
47 Pages Posted: 15 Sep 2013
Date Written: September 13, 2013
We analyze the impact of information asymmetry on bank default risk in Europe from 1993 to 2011 and show that banks that are more difficult to value by investors are characterized by a higher default risk. The risk-increasing effect of information asymmetry is present both before and during the global financial crisis but the drivers of this effect differ in the two periods. In the years preceding the crisis, information asymmetry leads to an increase in default risk via excessive risk-taking by banks; during the crisis it determines an increase in default risk through a larger exposure of banks to shocks. The excessive risk-taking by informationally opaque banks before the crisis is higher in large banks but the exposure to shocks during the crisis is larger in small informationally opaque banks. Our results highlight the macro-prudential benefits of rules on bank transparency and the importance of applying these rules also to smaller banks.
Keywords: Banking Risk, Global Financial Crisis, Information Asymmetry
JEL Classification: G21, G28
Suggested Citation: Suggested Citation