The Leverage Effect of Bank Disclosures

In a new paper, The Leverage Effect of Bank Disclosures, we challenge the widespread view that disclosure requirements prompt banks to reduce their risk and leverage.  That view has prevailed since at least 2004, when the Basel Committee introduced Pillar 3 (market discipline) into the Basel II Accord, making disclosure requirements a complement to minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2) (BIS, 2004).  The committee has emphasized that disclosure leads to lower risk and leverage because “the market will require a higher return from funds invested in, or placed with, a bank that … Read more