Market discipline and banking system transparency: Do we need more information?

The primary goal of enhancing banking system transparency by introducing additional disclosure requirements suggested by Basel II is to provide market participants with additional incentives to monitor their banks. This article attempts to discover the statistically significant relationship between quantitative market discipline and banking system transparency using cross-country data from 1990 to 2003. We use the Nier index, as well as an index constructed using World Bank 'Bank Regulation and Supervision' data, to measure banking system transparency. We found no statistically significant influence of banking system transparency on market discipline. Our result implies that measures designed to increase transparency not accompanied by requirements related to information availability and/or interpretability may not be effective in enhancing market discipline.