Balancing Stability and Transparency: Macroprudential Policies and Opacity Puzzle in Banking

This study examines the trade-off between financial stability and transparency by analysing the unintended effects of macroprudential policy adjustments on bank financial reporting behaviour. Using a global dataset of 1,179 listed banks across 84 countries over 1990-2023, we find that macroprudential tightening is associated with greater financial reporting opacity, reflected in increased discretionary use of loan loss provisions. This relationship is particularly evident for capital-based and asset-side instruments. We further explore two mechanisms that may help explain this pattern. First, the results are consistent with capital-management interpretation: income-decreasing discretionary provisioning associated with macroprudential tightening is particularly evident among better-capitalised banks, in line with incentives to build regulatory buffers and manage capital ratios. Second, during periods of macroprudential tightening, discretionary provisioning is more closely related to subsequent earnings. This pattern is consistent with a forward-looking signalling interpretation, although it may also capture changes in banks’ expectations of future risks and performance. Our findings reveal a potential opacity dimension of macroprudential policy adjustments. The results contribute to the literature by showing that changes in the macroprudential policy stance relate to banks’ reporting behaviour and by highlighting the challenges of pursuing financial stability objectives while maintaining transparent risk disclosure.