Do investors understand opacity in banks?

It is tough to navigate through corporate bank balance sheets and those of banks/financial institutions are even ore complex and opaque.

Stefan Avdjiev and Maximilian Jager in this paper analyse the opacity in European banks:

We investigate the patterns and implications of bank opacity in Europe using a rich bank-level data set. Employing a novel event study methodology, we document that public data releases by the European Banking Authority (EBA) on banks’ exposures to individual countries and sectors contained information that was not previously priced by equity and CDS markets.

We demonstrate that the degree of bank opacity varied considerably across bank nationalities and counterparty sectors – it was highest for European periphery banks’ sovereign exposures and European core banks’ private sector exposures.

Furthermore, we document that underestimations of banks’ credit risk by markets were associated with lower funding costs and higher wholesale borrowing (for all banks) as well as with greater risk taking and higher profitability (for European periphery banks).

It seems European banks and their investor have not learnt much from the 2008 crisis.