ISSUE 2015/20 DECEMBER 2015 FINANCIAL REGULATORY

TRANSPARENCY: NEWDATA AND IMPLICATIONSFOR EU POLICY

MARK COPELOVITCH, CHRISTOPHER GANDRUD AND MARKHALLERBERG

Highlights

• International financial institutions have promoted financial regulatory transparency, orthe publication by supervisors of financial industry data. Financial regulatorytransparency enhances market stability and increases democratic legitimacy.

• We introduce a new index of financial regulatory data transparency: the FRT Index.It measures how countries report to international financial institutions basic macro-prudential data about their financial systems. The Index covers 68 high-income andemerging-market economies over 22 years (1990-2011).

• We find a number of striking trends over this period. European Union members aregenerally more opaque than other high-income countries. This finding is especiallyrelevant given efforts to create an EU capital markets union.

• Globally, financial regulatory data transparency has increased. However, there isconsiderable variation. Some countries have become significantly more transparent,while others have become much more opaque. Reporting tends to decline duringfinancial crises.

• We propose that the EU institutions take on a greater role in coordinating andpossibly enforcing reporting of bank and non-bank institution data. Similar to the UnitedStates, a reporting requirement should be part of any EU general deposit insurancescheme.

Mark Copelovitch (copelovitch@wisc.edu) is an Associate Professor at the Robert M. LaFollette School of Public Affairs, University of Wisconsin, Madison. He is also an AssociateProfessor of Political Science and Public Affairs at the University of Wisconsin - Madison.Christopher Gandrud (gandrud@hertie-school.org) is a researcher at the Hertie School ofGovernance. Mark Hallerberg (hallerberg@hertie-school.org) is a Bruegel non-residentfellow and Director of the Hertie School of Governance’s Fiscal Governance Centre.

Telephone+32 2 227 4210 info@bruegel.org

www.bruegel.org

BRUEGELPOLICYCONTRIBUTION

FINANCIAL REGULATORY TRANSPARENCY: NEWDATA AND IMPLICATIONS FOR EU POLICY

MARK COPELOVITCH, CHRISTOPHER GANDRUD AND MARK HALLERBERG

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BRUEGELPOLICYCONTRIBUTION

1. Seehttp://www.imf.org/exter-

nal/np/mae/mft/Code/index.htm; accessed October

2015.

2. Seehttps://www.imf.org/exter-nal/np/exr/facts/data.htm;accessed October 2015.

3. Seehttp://www.imf.org/exter-nal/np/fsap/fssa.aspx;

accessed October 2015.

Financial regulatory transparency refers to theavailability of financial industry data made publicby supervisors. It has been lauded as a measureto enhance market stability (Arnone et al, 2007)and democratic legitimacy (Gandrud and Haller-berg, 2015). As with fiscal transparency, whichconcerns the availability of public sector financialdata, and monetary policy transparency, whichconcerns the data monetary policymakers use toset interest rates, international financial institu-tions have promoted regulatory transparency.Following the East Asian crisis of the late 1990s,the International Monetary Fund (IMF) includedtransparency in its 1999 Code of Good Practiceson Transparency in Monetary and FinancialPolicies1 and introduced data dissemination stan-dards for making financial data availablebeginning in 19962. Similar to its measures to pro-mote fiscal transparency, the IMF has establisheda Financial Sector Assessment Program (FSAP),under which it conducts voluntary reviews of thestability of financial sectors and the developmentof those sectors. ‘Transparency’ is one keyconsideration within this programme. While it is upto the country in question to approve publicationof the IMF’s FSAP review, most are publiclyavailable online, and they usually include a reviewof the extent to which a given country observesthe Fund’s standards and codes3.

The Basel Committee for Banking Supervisionadded regulatory transparency to its CorePrinciples for Effective Banking Supervision in2006. Within the European Union, the EuropeanBanking Authority (EBA) has made a number ofrecent attempts to promote regulatory trans-parency, as have other EU financial sectorinstitutions such as the the European Central Bank(ECB) and the European Insurance and Occupa-tional Pensions Authority (EIOPA). We discussthese initiatives in more detail below, but there iscurrently no measure of transparency that isbroadly comparable across countries or that

FINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICY

captures whether supervisors make public macro-prudential data.

In order to address this gap in measuring regula-tory transparency, we introduce a new interna-tional financial regulatory data transparencyindex. We call it the Financial Regulatory Trans-parency (FRT) Index. The FRT Index measureswhether countries report core macro-prudentialdata about their financial systems to internationalfinancial institutions like the IMF and World Bank.The Index currently covers 68 high-income andemerging market economies over 22 years(1990-2011). The FRT Index is freely available fordownload at: https://github.com/FGCH/FRTIndex.

WHY REGULATORY TRANSPARENCY IS IMPORTANT

Regulatory transparency is important in thecontext of several ongoing political debates.Regulatory transparency is connected to greaterliberalisation of financial markets in other parts ofthe world, and it can strengthen a capital marketsunion by making the financial sector moreefficient. Gelos and Wei (2005) find that interna-tional investors invest less and capital flight isgreater during crises in opaque countries.Copelovitch et al (2015) find that countries withgreater regulatory transparency pay lower rates ofinterest on their sovereign bonds when debt bur-dens increase. The logic for this finding is straight-forward: investors have a better understanding ofwhat is going on in a country’s banking sectorwhen regulatory transparency is high, and theyare less nervous about implicit liabilities to thegovernment accounts from the financial sector,liabilities which typically go unreported ingovernment budgets (see Irwin, 2015).

Despite the significant benefits of regulatorytransparency – including enhancing theefficiency of financial markets and reducing sov-ereign borrowing costs – the so-called Five Presi-

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BRUEGELPOLICYCONTRIBUTIONFINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICY

4. See https://www.banking-supervision.europa.eu/press/speeches/date/2015/htm

l/se150127.en.html;accessed October 2015.

5. The time inconsistencyproblem for monetary

policy assumes the follow-ing. Labour representativeswill ask for lower wages in

contract negotiations if theyexpect that inflation will below in the future. A policy-maker has an incentive topromise low inflation whencontracts are agreed, but

then to deliver high inflationin the second period tostimulate the economy.

Knowing this, labour repre-sentatives will ask for

higher wages in the firstperiod. An independent cen-tral bank, which can commit

credibly to low inflation,addresses this problem. Iflabour representatives donot know whether inflationwill be low or high in the

next period, they will ask forhigher wages, and this

behaviour then increasesthe inflation rate.

dents’ Report on Completing Europe's Economicand Monetary Union (Juncker, 2015), in which thepresidents of the EU institutions suggest a wayforward for the euro area, is curiously silent on theneed for transparency in the section ‘Towards aFinancial Union’. Nevertheless, the need forgreater transparency fits the report’s overalltheme of ‘Democratic Accountability, Legitimacy,and Institutional Strengthening.’

One of the best explanations for the need for suchtransparency comes from Ignazio Angeloni, anECB Supervisory Board Member and Bruegelfellow-at-large, in a January 2015 speech4. Hedescribes several parallels between monetarypolicy transparency and regulatory transparency.As with monetary policy, there is a clear rationalefor having a politically-independent bank supervi-sor5. Angeloni identifies a clear time-inconsis-tency problem because “supervisory forbearancemay help protect confidence in individualinstitutions in the short run, if the supervisorenjoys a high degree of credibility, but is likely tobe detrimental to such credibility, and to financialstability, over a longer horizon.” He cautions thatthere is a difference between the transparency ofinstruments and transparency about supervisedbanks, and he argues that proprietary informationfor specific banks should be treated confidentially.However, he also contends that timely reportingof regulatory information is important for investorsand fosters confidence in the banking sector. Themain message is that the supervisor should be astransparent as possible, unless transparencyraises concerns about the release of proprietaryinformation that can damage a specific bank.

As Angeloni (among others) also notes, there isa general movement towards greater trans-parency for democratic accountability reasons.Gandrud and Hallerberg (2015) argue that, inorder for elected officials and citizens to holdsupervisors accountable for acting in the publicinterest, they need to be able to observe regula-tory outputs. Data transparency facilitates thispolicy objective. The ability to observe policy out-puts is especially important in the euro areabecause institutional structures make it difficultfor elected European officials to influence super-visory appointments ex ante.

EXISTING MEASURES OF REGULATORYTRANSPARENCY

While one can also consider the transparency ofinformation from individual banks that financialsupervisors collect (see for example Gandrud andHallerberg, 2015), we focus here on the reportingof macro-prudential data at the level of a country’sfinancial sector. Existing assessments of regula-tory transparency are based on self-reportedsurveys of supervisors’ rules and practices.Financial regulatory transparency indices havelargely been constructed by summing responsesto these survey question. For example, Liedorp etal (2013) sent a 15 question survey to 42 bankingsupervisors, 57 percent of which replied. Thesurvey had questions on a variety of componentsrelated to multiple aspects of regulatory trans-parency including what they termed economic,procedural, political, policy and operational trans-parency. They then created composite scores bysumming responses to the survey questions foreach of the five areas and by creating a total sumscore. Arnone et al (2007) used a four-point scaledevised from classified IMF staff assessments ofcountry compliance with IMF codes of good prac-tice. Masciandaro et al (2008) conducted a surveyof supervisory accountability and included someitems related to transparency. Seelig and Novoa(2009) also conducted a survey of supervisorypractices, including transparency; however, asLiedorp et al (2013) note, the questions and coun-try details are not publicly available.

Beyond the fact that a number of these trans-parency indices are not themselves transparentand do not measure reporting to internationalinstitutions, they have other shortcomings. First,survey methods are laborious to construct, requir-ing numerous contacts with supervisors and sec-ondary verification, largely via institutions’websites. Second, they rely on temporallyephemeral information, eg institutional websitesand staff with institutional knowledge. These twoissues are of substantive importance becausethey prevent both the easy updating of the indicesat regular intervals and the extension of theindices back in time. These indices are usuallysnapshots that cannot readily be turned into up-to-date time-series for time-series-cross-sectionalanalysis. Third, these surveys – at least those not

FINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICYBRUEGELPOLICYCONTRIBUTION

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conducted by the IMF – have high non-responserates. Non-response information is discarded inthe construction of the indices. Fourth, theirconstruction involves summing responses. Thisassumes that each item is equally important formeasuring transparency. However, it is quite likelythat some data items may be ‘easier’ to reportthan others because they are, for example, lesspolitically sensitive. Fifth, the indices do notinclude explicit estimates of the degree of uncer-tainty within which estimates are made.Finally, these approaches either do not incorpo-rate prior information into their estimates or do notdo so transparently.

FRT: A NEW MEASURE OF REGULATORYTRANSPARENCY

To create an index that addresses these issues,we treat financial regulatory data transparency asan unobserved latent variable summarising acountry’s likelihood of reporting yearly data onitems included in the World Bank’s Global Finan-cial Development Database (GFDD). �Cihák et al(2012) created the first version of the databaseby collating information that had been tabulatedover many years by a number of internationalinstitutions6. We include countries classified ashigh income by the World Bank and countries onJP Morgan’s Emerging Market Bond Index (EMBI).We also include China, as it is not in the EMBI.Using these criteria, the dataset covers 68 coun-tries, 22 years (1990-2011) and 13 items7, whichare variables for quantities such as bank deposits,liquid liabilities and non-bank financial institu-tions’ assets.

6. Access to the mostupdated version of the

dataset is available throughhttp://data.worldbank.org/data-catalog/global-finan-

cial-development;accessed December 2014.

7. The full list of itemsincluded in the Index is:private credit by depositmoney banks to GDP (%);non-bank financial institu-tions’ assets to GDP (%);

deposit money bank assetsto deposit money bankassets and central bankassets (%); central bank

assets to GDP (%); mutualfund assets to GDP (%);

financial system depositsto GDP (%); insurance com-

pany assets to GDP (%);domestic credit to privatesector to GDP (%); banklending-deposit spread;credit to government and

state-owned enterprises toGDP (%); bank deposits toGDP (%); liquid liabilities toGDP (%); bank credit to bank

deposits (%). All of thesevariables were originally

gathered in the IMF’sInternational Financial

Statistics database, exceptfor mutual fund assets toGDP, insurance companyassets to GDP, and banklending-deposit spread.These were available

through the World Bank

In order to calculate the FRT index, we used a toolcalled Dynamic Hierarchical Bayesian ItemResponse Theory Modelling. Item response theory(IRT) was initially developed in the field of educa-tional testing. When testing students, teachers tryto measure students’ underlying, or ‘latent’,ability in a subject such as maths or biology.A simple way to do this would be to add up all ofthe correct responses to each test question(item). However, some questions are harder toanswer than others. It may not be possible toanticipate beforehand how hard students will findeach question to be. IRT models allow us to esti-mate how difficult questions are and incorporatethis information into our estimation of how ablestudents’ are in the subject.

We can use this method to measure transparencyas well (see Hollyer et al, 2014). In place of adataset of student’s correct/incorrect answers totest questions, we created a dataset of whether ornot a country reported each of the 13 items in theGFDD in each year. Rather than measuring astudent’s latent ability in some academic subject,we used IRT to measure countries’ latent propen-sity to release data to the GFDD – ie be transparent– in each year. We measure how ‘difficult’ eachitem is to report and we estimate weights of howmuch each item contributes to the transparencyindex by how often it is reported across all coun-tries in our sample.

We find that the least-reported items, ie the mostdifficult items to report, relate to non-bank insti-tutions: reporting mutual fund assets, insurancecompany assets, and other non-bank financialinstitutions – including post-office savings insti-tutions, building and loan associations, develop-ment banks and offshore banking institutions.‘Easy’ items to report tend to involve quantities fordeposit banks such as bank credit to bankdeposits and financial system deposits assets, aswell as central banks such as central bank assets.

Dynamic Hierarchical Bayesian Response TheoryModelling also enables us to include prior infor-mation from countries’ reporting in previous years,thus improving our estimates of how likely eachcountry was to report in later years. Finally, thismethod enables us to estimate our uncertaintyabout the transparency scores. This helps us

0.0

0.1

0.2

0.3

1990 1995 2000 2005 2010

Mea

n FR

T sco

re

Figure 1: Mean FRT Scores (full sample)

Source: Bruegel.

FINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICYBRUEGELPOLICYCONTRIBUTION

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8. Specifically, it is themean of the median coun-

try-year estimates.

avoid differences between countries being exag-gerated, a problem that plagues many othergovernance indices, especially those that simplyordinally rank countries.

For full details about our model and its validationsee: http://ssrn.com/abstract=2701852

TRENDS IN REGULATORY TRANSPARENCY, 1990-2011

Many countries’ FRT scores have changeddramatically over the past 20 years. Before look-ing at changes in countries and country groups, itis useful to consider the overall patterns in thedata. Figure 1 shows the mean FRT score between1990 and 20118. Most countries have FRT scoresclose to zero. This means that they generally reportitems that are estimated to be easy to report, butnot the difficult items. A country moves away fromzero either when it reports the more difficult itemsrelated largely to non-bank financial institutiondata (thereby achieving higher positive scores),or when they do not report the easy items (therebyearning negative scores). On average, internationalreporting of financial regulatory data increasedfrom 1990 through about 2005. From 2006, report-ing declined, with most of the years with the steep-est declines occurring during the recent financialcrisis. There is another interesting and possiblyrelated dip in average global transparency: whileaverage transparency largely increased from 1990through the mid-2000s, there was a noticeablestagnation in 1997 and 1998. This was the heightof another multi-country financial crisis and, as wediscuss further below, during the multi-countryrestructuring of the French bank Crédit Lyonnais –the largest bank failure up to that point.

Table 1 shows the countries with the top andbottom international financial regulatory datatransparency scores in 1990 and 2011. Thecountries at the top and bottom of the FRT Indexin 1990 divide roughly into more and less-developed economies. Interestingly, the 2011scores seem to have flipped. A number of coun-tries that were opaque in 1990, such as Russia,become very transparent in 2011. Likewise, oncehighly transparent countries, New Zealand andNorway, became opaque by 2011, while Canadamoved from most transparent to third least-trans-parent country.

TRANSPARENCY TRENDS IN THE EUROPEAN UNION

This section compares the level of transparencyin the EU with other high-income economies. Tocheck whether the standards are higher in theeuro area and to be sure that we not picking uponly changes in accession countries in the mid-2000s, we focus on members of the euro area,and the pre-2004 member states (the EU15).Figure 2 compares the mean FRT Scores of euro-area and EU15 countries to those of other high-income countries in the sample. It illustrates thatEU member states are less transparent inreporting national aggregate data to the IMF andWorld Bank compared to other high-income coun-tries. In Figure 3, which shows FRT scores for theeuro-area countries in the sample, we can see thatalmost all have scores close to zero for much ofthe sample period. Through the mid-2000s, non-EU high-income countries offered on averagemore international regulatory data transparencythan either euro-area or EU15 members. Thereason for the discrepancy is that few Europeancountries report non-bank financial institution

Table 1: Most and least-transparent countries (based on median estimated FRT), ranked by FRTIndex scores

1990 2011

Most transparent

Canada BrazilJapan ColombiaUnited States Russian FederationNetherlands PeruPhilippines South Africa

Least transparent

Ukraine San MarinoCroatia BarbadosCzech Republic CanadaRussian Federation New ZealandBrunei Darussalam Norway

Source: Bruegel.

9. The only EU memberstates to report this item in

the sample period are:Cyprus (2004-07), Ireland(1990-98), Netherlands(1990-98) and Sweden

(1995-99).

10. The Netherlands had ascore of 1.06 in 1991.

FINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICYBRUEGELPOLICYCONTRIBUTION

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INCREASINGLY TRANSPARENT COUNTRIES

The patterns of change in the overall dataset areinstructive for understanding the position mostEuropean countries face. Moving beyond the EUcountries, we see that a number of countries madesignificant improvements in reporting during the1990s and 2000s. Figure 4 shows the trans-parency scores for the fifteen countries that madethe largest cumulative improvements to theirmedian FRT scores from 1990 through 2011.These countries tended to be upper middle-income countries such as Argentina, Brazil, theCzech Republic, Croatia, Russia, and South Africa,which went through considerable processes ofopening up to international capital markets duringthe sample period (Ahmed and Zlate 2014).Reporting more financial system data to interna-tional financial institutions may have been part ofthis process, since making such data available toforeign investors via the IMF and World Bank couldhave given investors more information on whichto make judgments about financial system risks.These significant increases in transparency mightalso have contributed to these countries’ ability toattract foreign investment over the last twodecades.

Germany, as a high-income, industrialised coun-try, is seemingly a notable outlier in this subsam-ple. However, the general process behindGermany’s increasing transparency may be simi-

data – eg data on assets from insurance compa-nies, state-owned non-bank institutions, postalsavings banks, investment banks, and offshorefinancial institutions9 – over the entire sampleperiod. Since about 2004, many euro-area coun-tries have stopped reporting a basic quantity: thebank lending to deposit spread (see Figure 7).Only during the height of the financial crisis didreporting in other high-income OECD countriesdecline towards the low average level of EUmember states. The US is notable for both its rela-tively high transparency level and its consistencyin reporting data, even during the financial crisis.No EU country has ever achieved a median trans-parency score at or above the US’s 1.1 level10.

While these are findings on macro-prudential data,we note that there is already interesting work onregulatory transparency in the EU at the microlevel. Gandrud and Hallerberg (2015) examinedwhether or not EU member-state regulatorsregularly release regulatory data about individualbanks. They found that overall member stateswere markedly opaque, especially when com-pared to US regulators. The FRT considers thetransparency of the overall financial sector, notjust the banking sector, and the dataset consistsof country aggregates, rather than individual bankinformation. But the evidence suggests a similartrend to that found with the micro data--when com-pared to other countries at a similar income level,transparency in the EU is lower.

0.0

0.4

0.8

1.2

1990 1995 2000 2005 2010

Mea

n FR

T sc

ore

Euro area

0.0

0.4

0.8

1.2

1990 1995 2000 2005 2010

EU−15

US

Other high income, OECD not EUEU

Figure 2: Mean FRT scores for euro-area members and the EU15 vs. all other high-income countries

Source: Bruegel.

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BRUEGELPOLICYCONTRIBUTIONFINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICY

−0.50.00.51.0

2.0

1990 2010

Austria

−0.50.00.51.0

2.0

1990 2010

Belgium

−0.50.00.51.0

2.0

1990 2010

Cyprus

−0.50.00.51.0

2.0

1990 2010

Estonia

−0.50.00.51.0

2.0

1990 2010

Finland

−0.50.00.51.0

2.0

1990 2010

France

−0.50.00.51.0

2.0

1990 2010

Germany

−0.50.00.51.0

2.0

1990 2010

Greece

−0.50.00.51.0

2.0

1990 2010

Ireland

−0.50.00.51.0

2.0

1990 2010

Italy

−0.50.00.51.0

2.0

1990 2010

Luxembourg

−0.50.00.51.0

2.0

1990 2010

Malta

−0.50.00.51.0

2.0

1990 2010

Netherlands

−0.50.00.51.0

2.0

1990 2010

Portugal

−0.50.00.51.0

2.0

1990 2010

Slovenia

−0.50.00.51.0

2.0

1990 2010

Spain

Source: Bruegel. Note: Points indicate median estimated FRT scores. Thin lines indicate the 95 percent highest posteriordensity of the estimated scores, ie a range where the real score most lies. Thick lines indicate highest 90 percent posteriordensities. The same intervals are used throughout this paper.

Figure 3: FRT scores for each country in the euro area by 2015 included in the FRT sample

−4−2

02

1990 2010

Brunei Darussalam

−2024

1990 2010

Russian Federation

01234

1990 2010

Colombia

0246

1990 2010

Brazil

01234

1990 2010

South Africa

0123

1990 2010

Peru

−0.50.00.51.01.5

1990 2010

Singapore

−1.0−0.5

0.00.51.0

1990 2010

Ukraine

−1.0−0.5

0.00.5

1990 2010

Croatia

−0.50.00.51.01.52.0

1990 2010

Ecuador

0

1

2

1990 2010

Argentina

−0.5

0.0

0.5

1990 2010

Slovenia

−1.5−1.0−0.5

0.00.5

1990 2010

Czech Republic

−0.50−0.25

0.000.25

1990 2010

Germany

−0.250.000.25

1990 2010

Morocco

Source: Bruegel.

Figure 4: FRT transparency scores for the 15 countries with the largest cumulative reportingimprovement (ordered by improvement rank)

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BRUEGELPOLICYCONTRIBUTION FINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICY

INCREASINGLY OPAQUE COUNTRIES

Figure 6 shows the 15 countries that had thegreatest cumulative decline in their financial reg-ulatory data reporting between 1990 and 2011.One particularly interesting case is Hungary. In1990 Hungary had a median FRT score above 0.This score changes over time, with a clear shift tolow transparency in 2009. The 2009 figures wouldhave been reported to international institutions in2010, the year that Viktor Orbán’s Christian Dem-ocratic People’s Party entered government. Thisgovernment introduced a number of major eco-nomic and financial policy changes thatsometimes directly contradicted Hungary’s inter-national economic commitments, including reduc-ing the independence of the central bank. Thesame political process might have caused Hun-gary to dramatically reduce its reporting of finan-cial regulatory data to international institutions.

Such a shift towards opacity is not only confinedto countries that so openly rejected internationalstandards. There is a large group of established

lar to that of the emerging market economies. Ger-many’s traditionally parochial capital marketswent through a process of financial market liber-alisation and internationalisation during thisperiod (Jacob, 2015).

A group of small Persian Gulf states becamenoticeably more transparent recently. Thoughthey are still fairly opaque (see Figure 5), theyimproved during the mid to late-2000s. This wasa period where Qatar, Dubai and Abu Dhabi wereattempting to transform themselves into interna-tional financial centres. This finding is informativegiven the efforts to complete a capital marketsunion in the European Union, because it suggeststhat jurisdictions that want to pursue deeper finan-cial market integration become more transparent.

The finding from the countries that increased reg-ulatory transparency is the same – increases intransparency are accompanied by the opening upand deepening of financial markets overall. Thispoint is relevant for efforts to develop a capitalmarkets union in the EU.

−0.−0. 44

−0.−0. 22

0.0.00

19901990 20102010

OmanOman

−0.−0. 66

−0.−0. 44

−0.−0. 22

0.0.00

19901990 20102010

QatarQatar

−0.−0. 55

−0.−0. 44

−0.−0. 33

−0.−0. 22

19901990 20102010

United Arab EmiratesUnited Arab Emirates

Source: Bruegel.

Figure 5: FRT transparency scores for three Gulf States

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BRUEGELPOLICYCONTRIBUTIONFINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICY

democracies with surprising declines in financialregulatory data reporting over the sample period,including Denmark, New Zealand, Japan, Israel,Norway and Canada. Canada is a particularlyextreme example: from the beginning of thesample (1990) through 2006, Canada reported allof the items in the Index, thereby earning the high-est FRT score, by far, over this period. However,reporting declined from 2006, to the point that,from 2009-11, Canada only reported about 20 per-cent of the component variables in the FRT Index.

It is not yet clear why the reporting of financial reg-ulatory data in these countries has declined sodramatically since the mid-2000s. This has notbeen the general trend in established democra-cies. For example, why did Norway virtually stopreporting, while Sweden changed very little overthe entire period? Why did reporting in Canadadecline so dramatically, while reporting in the UShas held constant at a relatively high level? Morework is needed to understand why some countriesthat otherwise closely adhere to internationalreporting standards virtually stopped reporting

data on their financial systems to the World Bankand IMF starting in the mid-2000s.

FINANCIAL TRANSPARENCY DURING EPISODES OFFINANCIAL STRESS

Episodes of financial stress are sometimes asso-ciated with declines in financial data reporting.Reporting declined noticeably during the recentglobal financial crisis. Figure 7 shows the propor-tion of countries reporting each of the 13 items inthe years 2000, 2005, 2008 and 2011. Reportingof many items related to bank deposits, privatecredit and insurance institution assets declinednotably from 2008, although for some variablesand countries (such as bank lending-depositspreads in the EU countries), reporting had beendeclining for a number of years prior to the onsetof the global crisis.

Another striking example of the decline in trans-parency during episodes of financial stress is thesimultaneous drop in reporting by France, theBenelux countries and Austria in the mid- to late

0.00.51.01.5

1990 2010

Egypt, Arab Rep.

0.00.51.01.52.0

1990 2010

Switzerland

−0.4−0.2

0.00.2

1990 2010

Israel

−0.4−0.2

0.00.2

1990 2010

Denmark

0.00.40.8

1990 2010

Cyprus

−0.250.000.250.50

1990 2010

Poland

−0.250.000.250.50

1990 2010

Hungary

−0.50−0.25

0.000.25

1990 2010

Barbados

0.0

0.5

1.0

1990 2010

Ireland

−0.50.00.5

1990 2010

New Zealand

−0.50.00.51.01.52.0

1990 2010

Netherlands

−0.50.00.51.01.52.0

1990 2010

Trinidad & and Tobago

o

0

2

4

1990 2010

Japan

−10123

1990 2010

Norway

0.02.55.07.5

1990 2010

Canada

Source: Bruegel.

Figure 6: FRT transparency scores for the 15 countries with the largest cumulative reportingdeclines (ordered by decline rank)

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BRUEGELPOLICYCONTRIBUTION FINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICY

1990s (see Figure 8). This decline immediatelyfollowed the collapse and controversial bailout ofFrance’s largest bank, Crédit Lyonnais, as a con-sequence of its gross mismanagement. At thetime, according to Caprio and Klingebiel (1996),Crédit Lyonnais’ collapse was the largest bank fail-ure globally. In the wake of the Crédit Lyonnais col-

lapse, France, the Netherlands, Belgium andAustria simultaneously stopped reporting sevenof the 13 items – most referring to credit provisionby banks11 – in the FRT Index in 1998; Luxem-bourg largely followed suit in 1999. This dramaticreporting decline coincides with a specific phaseof the Crédit Lyonnais restructuring process: the

11. Specifically: privatecredit by deposit moneybanks to GDP (%); deposit

money bank assets todeposit money bank assetsand central bank assets (%);financial system deposits toGDP (%); insurance companyassets to GDP (%); financialsystem deposits to GDP (%);domestic credit to privatesector (% of GDP); credit to

government and stateowned enterprises to GDP(%); bank credit to bank

deposits (%).

Non−EU members EU members

0.00

0.25

0.50

0.75

1.00

2000 2005 2008 2011 2000 2005 2008 2011

Prop

ortio

n re

porte

d

Banking and private creditCentral bankCredit to government ownedFinancial system deposits/liabilitiesInsurance companiesMutual fundsNonbank financial institutions

Source: Bruegel.

Figure 7: Proportion of countries reporting each item in the FRT (grouped by sector type)

−0.50

−0.25

0.00

0.25

1990 2010

France

−0.75

−0.50

−0.25

0.00

0.25

1990 2010

Austria

−0.50

−0.25

0.00

0.25

1990 2010

Belgium

−0. 6

−0. 4

−0. 2

0. 0

1990 2010

Luxembourg

−0. 5

0.0

0.5

1.0

1.5

2.0

1990 2010

Netherlands

Source: Bruegel.

Figure 8: FRT transparency scores for France, the Benelux countries and Austria

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BRUEGELPOLICYCONTRIBUTIONFINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICY

sale of the core French institution and its non-French subsidiaries. Specifically, Crédit Lyonnais’subsidiaries in Belgium, the Netherlands and Aus-tria were sold off. Crédit Lyonnais (Belgium) wassold to Deutsche Bank and Crédit Lyonnais(Austria) was sold to Anglo Irish Bank in 1998.Crédit Lyonnais Bank Nederland was sold to theBelgian Generale Bank in 1995 and subsequentlybecame Generale Bank Nederland. At this point, itis not clear exactly why reporting decreased somarkedly during this period. However, this episodedoes demonstrate that transparency practicesmight be ignored during times of severe financialcrisis or stress, especially if reporting practicesare not fully institutionalised.

CONCLUSION: POLICY PROPOSALS FOR A MORETRANSPARENT UNION

Our findings using the FRT Index demonstrate thatthe availability of financial regulatory data trans-parency varies considerably in different countriesand over time, both within and beyond the EU.European countries provide a relatively low levelof transparency compared to other high-incomeOECD countries. This is especially true when wecompare EU members to another large bankingunion: the United States. In order to improve theefficiency and democratic accountability of theEuropean banking and capital markets unions, itwould be useful to institutionalise the reporting offinancial system data to international institutionssuch as the IMF and World Bank.

We propose that the European Central Bank, Euro-pean Banking Authority, the European Insuranceand Occupational Pensions Authority and theEuropean Securities and Markets Authority –which together have supervisory powers andaccess to the relevant data on currently under-reported quantities – take a greater and moreactive role in coordinating the reporting of regula-tory data to the IMF and World Bank. Especially

within the euro area, this would have the benefitof improving the euro area’s relationship and rep-resentation with the IMF. While these are Euro-pean-level institutions, they should report thenational-level data in order to ensure greaterregulatory transparency for the euro area as awhole and for its member states. Even though thistype of data is not directly within the scope of thecapital markets union, such reporting is certainlyin the spirit of creating a more efficient financialsector.

This increased transparency is extremely impor-tant. It provides markets and voters with moreinformation about the relative health of a country’sfinancial sector. Past empirical work shows thatmarkets are more nervous about countries thathave less regulatory transparency when their debtburdens increase. The reason is that markets donot know what other liabilities the governmentmight face, and they punish the less-transparentcountries with higher interest rates. This trans-parency is also relevant for increasing the abilityof voters to hold their institutions accountable.

Finally, and relatedly, one might ask if the prob-lem is not with the supervisor releasing the databut with the relevant institutions that are notreporting it. That is, a supervisor cannot reportdata it does not have. As we discussed in pastwork (Gandrud and Hallerberg 2015), there is alsoan issue of regulatory transparency for individualbanks. In the United States, where this type oftransparency is high, banks fall under the UScommon deposit insurance scheme only if theyreport reliable data that the supervisor thenmakes public. Given the initial moves towards acommon deposit insurance scheme in the Euro-pean banking union, a similar requirement shouldbe part of any extension of deposit insuranceacross borders, be it as a common pool or aslinked pools of different national programmes.

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BRUEGELPOLICYCONTRIBUTION FINANCIAL REGULATORY TRANSPARENCY: NEW DATA AND IMPLICATIONS FOR EU POLICY

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