The Effects of IFRS 7 Adoption on Bank Disclosure in Europe

With the endorsement of IFRS 7, which became effective in 2007, the European regulation of bank disclosures has substantially changed. Using a sample of 171 banks from 28 European countries, I analyze the effect of the standard's first-time adoption on disclosure quality. I find that disclosure quality has generally increased both in financial statements and in risk reports but that the focus of disclosures has shifted from market risk exposures to credit risk exposures. The effect of the first-time adoption strongly varies across countries. These variations can be explained by differences in the enforcement and interpretation of IFRS 7 by national banking supervision. Using supervisory practices in Denmark, Italy and the UK as representative examples, I distinguish between an interventionist and a non-interventionist approach. The findings suggest that it is not only the content of IFRS 7 but also the enforcement of the standard that accounts for the increase in disclosure quality. With respect to the enforcement of bank disclosures, the results therefore support recent proposals by the De Laroisière High Level Expert Group to harmonize financial supervision within the EU.