Bank Transparency and Risk Taking: Empirical Evidence from Tunisia

Abstract

An important unresolved issue in finance is the extent to which bank transparency promotes or undermines banking risk-taking. Financial accounting information is an essential component of transparency and a necessary condition for market discipline. This latter can be conceptualized as a market-based incentive scheme with which investors in banking securities penalize banks for greater risk-taking by asking for higher returns on their investments. However, in developing countries, where financial markets are insufficiently developed, the role of market discipline in limiting banks’ risk-taking may be restricted. This paper examines the impact of transparency, as measured by voluntary disclosure of financial information, on the fragility of Tunisian banks. This study is motivated by the decision of the Central Bank of Tunisia to implement the directives of the second Basel Accord to improve the soundness and the safety of the Tunisian banking system. We examine a sample of ten Tunisian banks listed on the Stock Exchange of Tunis over the period 2000-2011. The results show that transparency has no effect on Tunisian banks’ risk-taking. Similarly, the results indicate that the capital adequacy ratio has no effect on the non-performing loans rate. These results may undermine the effectiveness of the guidelines of the Basel Committee agreements to reduce risk-taking by Tunisian banks.