Financial regulation and transparency of information: evidence from banking industry

Purpose - The purpose of this paper is to see if a difference exists between the impact of the subprime crisis on countries with more transparency and more regulated finance than on others. A further objective is to explain the success of the Brazilian case in avoiding the financial crisis and to show empirical evidence for the presence of market discipline. Design/methodology/approach - The paper offers a regulation and transparency index (RTI) based on 37 countries. Considering RTI and stock market index of developed economies, BRICs economies, and developing economies, cross-country estimations are made. Furthermore, the analysis for market discipline in the Brazilian case is based on GMM panels, taking into account market discipline through subordinated debt holders (debentures). Findings - The results indicate that a higher degree of regulation and transparency is related to a higher return and a lower volatility in the stock market during the subprime crisis. Moreover, one of the main reasons for the apparent success of the Brazilian case in facing the crisis is the combination of a strong regulation of the financial system and the presence of market discipline. Practical implications - Transparency of information by the banking sector is relevant for the regulation of the financial system. Originality/value - The paper presents new insights for the literature on financial regulation and transparency of information in the search for a framework capable of avoiding financial crisis.