The European Central Bank published Working Paper No 3031 examining how disclosure of supervisory Pillar 2 capital requirements affects market efficiency, comparing banks that publicly disclose their Pillar 2 Requirements (P2R) with those that remain opaque. The paper concludes that greater supervisory transparency is associated with lower funding costs and improves the market’s ability to differentiate between safer and riskier banks. Using bank-level supervisory and balance sheet data and exploiting variation in P2R disclosure practices among Banking Union Significant Institutions over 2017-2020, the authors estimate an average 11.5% reduction in funding costs for disclosing banks versus non-disclosing peers. The effect is heterogeneous, with the safest quartile of disclosing banks, defined as those with a Common Equity Tier 1 P2R below 1.5% of risk-weighted assets, benefiting most with average funding costs around 31.1% lower. The analysis also documents a mispricing pattern under opacity, where higher-risk non-disclosing banks can face lower funding costs, and finds that disclosure counteracts this by aligning funding costs more closely with supervisory risk assessments.
European Central Bank 2025-02-18
European Central Bank working paper finds Pillar 2 requirement disclosure lowers bank funding costs and improves market efficiency
The European Central Bank's Working Paper No 3031 examines how disclosing supervisory Pillar 2 capital requirements affects market efficiency, showing that transparency reduces funding costs and improves differentiation between safer and riskier banks. Using data from Banking Union Significant Institutions, the study estimates an average 11.5% reduction in funding costs for disclosing banks, with the safest quartile benefiting most. It also notes a mispricing pattern under opacity, where higher-risk non-disclosing banks may face lower funding costs, which disclosure helps correct.