Enhancing Loan Quality Through Transparency: Evidence from the European Central Bank Loan Level Reporting Initiative

Corporate Tax Enforcement Externalities and the Banking Sector

“…7 Additionally, we contribute to the banking literature in two ways. First, our findings contribute to the literature examining bank lending to SMEs (e.g., Berger and Udell [1995, 2002, 2006, Berger, Klapper, and Udell [2001]), and in particular research examining how regulatory actions impact SME lending (Ertan, Loumioti, and Wittenberg-Moerman [2017], Balakrishnan and Ertan [2019]). For example, Ertan, Loumioti, and Wittenberg-Moerman [2017] find that bank regulations requiring greater transparency on SME loans underlying asset-backed securities lead to improvement in the bank's information set on borrowers, and consequently an increase in loan quality.…”

“…First, our findings contribute to the literature examining bank lending to SMEs (e.g., Berger and Udell [1995, 2002, 2006, Berger, Klapper, and Udell [2001]), and in particular research examining how regulatory actions impact SME lending (Ertan, Loumioti, and Wittenberg-Moerman [2017], Balakrishnan and Ertan [2019]). For example, Ertan, Loumioti, and Wittenberg-Moerman [2017] find that bank regulations requiring greater transparency on SME loans underlying asset-backed securities lead to improvement in the bank's information set on borrowers, and consequently an increase in loan quality. We contribute by documenting that a nonbanking regulator, the tax authority, affects both the amount and average quality of bank lending via its oversight of SMEs, and that the impact on quality of the information used in the lending decision is at least partially 5 Mironov [2013)] and Almunia and Lopez-Rodriguez [2018] explore how tax enforcement efforts aimed at smaller firms affect performance, output, and tax avoidance.…”

The role of banking supervision in credit risk disclosures and loan loss provisions

“…The disclosure of LLPs plays a fundamental role in the market discipline framework because the cash flows and default risk of bank loans may have a significant impact on investors' estimates and therefore on stock market values (Wahlen, 1994). Based on the loan securitization market, Ertan, Loumioti, and Wittenberg-Moerman (2017) give evidence of how transparency can influence banks' credit practices and risk-taking, which leads to an improvement in the quality of securitized loans. Boland, Hogan, and Johnson (2018) reinforce the importance of The role of banking supervision in credit risk disclosures and loan loss provisions mandatory disclosures, as they constitute an effective and low-cost regulatory device.…”

Bank asset transparency and credit supply

“…First, the regulatory shock applied to banks that had already been in the ECB financing program, meaning that, while the amount of bank disclosures increased for treatment banks, the ECB financing itself remained constant. 6 Second, the regulation was not accompanied by any other significant banking law or a change in supervisory stringency that affected disclosing and nondisclosing banks differently (Ertan, Loumioti, and Wittenberg-Moerman 2017).…”

“…Another related study is by Ertan, Loumioti, and Wittenberg-Moerman (2017), who use the LLD regulation setting and find that mandated disclosures improve the quality of lending. A natural question that arises in this context is whether banks enhance quality by reducing lending.…”