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Does Banking System Transparency Enhance Bank Competition? Cross-Country Evidence

Andrievskaya I. K., Semenova M.
There seems to be a consensus among regulators and scholars that in order to improve the  functioning of a banking system and to stimulate bank competition, it is necessary to raise the level  of bank information transparency. However, empirical studies which examine the determinants of  competition in the financial sector, the effect of competition on financial stability, or the  relationship between transparency and bank stability, leave aside the link between transparency and  competition. The aim of this paper is to fill this gap in the literature. To test the hypothesis that  greater bank information disclosure is associated with lower market power and lower concentration  in the banking system, we use country-level data covering 213 countries. The years under  consideration are 1998, 2001, 2005 and 2010, which correspond to the years of the World Bank's  Banking Regulation and Supervision Survey rounds. Our findings do not always support the  conventional wisdom: countries with higher levels of transparency have lower levels of bank  concentration, while the link between transparency and competition is less pronounced. The effect  from information disclosure grows – for both concentration and market power – with an increase of  bank credit risks.