A number of recent policy initiatives have called for enhanced transparency of banking firms. While the hope is that enhanced transparency may improve incentives ex ante, it is less clear whether transparency is necessarily a good thing ex post, when a bank might have hit hard times and provision of information could have a destabilising effect. This paper provides a synopsis of these different effects and provides some new, bank-level evidence in an attempt to clarify empirically whether, taking ex ante and ex post effects together, transparency is likely to reduce or increase bank stability. The analysis suggests that, on balance, transparency reduces the chance of severe banking problems and thus enhances overall financial stability.

This paper assesses the impact of introducing an efficient payment system on the amount of credit provided by the banking system. Using payment system reforms in Eastern European countries over the 1995–2005 period as a natural experiment, we find evidence that payments reforms were an important precondition for the credit boom observed in our sample countries. We also find that payment system reforms led to a shift away from cash (outside money) and towards demand deposits (inside money) as a medium of exchange and that this in turn enabled an expansion of credit in the sample countries. These findings have important implications for our understanding of financial intermediation, highlighting the nexus between banks’ role as providers of payment services and as providers of credit.

This paper examines empirically the hypothesis that market discipline is effective in providing incentives for banks to limit their risk of default, by holding capital buffers against adverse outcomes in portfolio risk. We have constructed a large cross-country panel data set consisting of observations on 729 individual banks from 32 different countries over the years 1993 to 2000. Theory implies that the strength of market discipline ought to be related to the extent of the government safety net, the observability of bank risk choices and to the proportion of uninsured liabilities in the bank's balance sheet. Using panel data techniques, we test whether these factors provide incentives for banks to hold larger capital buffers against adverse outcomes in portfolio risk. Our results suggest that government safety nets result in lower capital buffers and that stronger market discipline resulting from uninsured liabilities and disclosure results in larger capital buffers, all else equal. While our results therefore point to the effectiveness of market discipline mechanisms in general, we also find that the effect of disclosure and uninsured funding is reduced when banks enjoy a high degree of government support. Our results finally suggest that while competition leads to greater risk taking incentives, market discipline is more effective in curbing these incentives in countries where competition among banks is strong.

Governments face conflicting objectives in terms of the provision and design of safety nets for banking systems. Safety nets may reduce market discipline and can thus increase the likelihood of a banking crisis. But safety nets are adopted because of the perceived benefits they will confer in either preventing a weak banking system from spilling over into a full-blown crisis or in enabling the government to handle a crisis more effectively. This paper provides evidence on the effects of government safety nets on both these aspects and discusses implications for policy.