Bank opacity and risk-taking: Evidence from analysts' forecasts

We depart from existing literature by invoking analysts' forecasts to measure banking system opacity and then investigate the impact of such opacity on bank risk-taking, using a large panel of US bank holding companies, over the 1995--2013 period. We uncover three new results. Firstly, we find that opacity increases insolvency risks among banks. Secondly, we establish that the relationship between opacity and bank risk-taking is accentuated by the degree of banking market competition. Thirdly, we show that the bank business model moderates the risk-taking incentives of opaque banks, albeit only marginally. Overall, these findings suggest that the analysts’ forecast measure of bank opacity is useful for understanding risk-taking by publicly-traded banks, with important implications for bank stability.