The Bright Side of Transparency: Evidence from Supervisory Capital Requirements

Should regulators disclose private information about the creditworthiness of the companies it supervises? This paper exploits a change in the disclosure policy of the European Central Bank (ECB) in 2020 to make progress on this question. We compare European banks along multiple dimensions before and after the ECB published for the first time bank-by-bank information on Pillar 2 requirements (P2R). We show that bond prices and cross-border holdings of debt securities are sensitive to new regulatory information as well as to rating gaps between the ECB and private credit rating agencies. Overall, our results support the view that supervisors have specific, distinctive, and valuable knowledge of the banks they supervise.