Are Transparent Banks More Efficient? Evidence from Russia

Are more transparent banks more efficient? Daring to ask may sound paradoxical, given that increasing transparency is generally considered to reduce information asymmetries and thus to trigger many beneficial mechanisms, from reducing the cost of capital to better governance. Many of these advantages have received empirical support in the literature, and the sub-prime crisis of 2007 has reinforced the general presumption that transparency is socially beneficial, especially when imposed on banks. However, the sheer fact that strong disclosure regulations had to be imposed proves that firms, in general, and banks, in particular, may feel transparency to be costly and are not necessarily willingly transparent. Hence, everything happens as if the society at large benefited from transparency, while firms have to cope with a trade-off as, at least for some of them, transparency may be more costly than beneficial (Verrechia, 2001; Farvaque et al., 2009). Increased transparency may thus not be synonymous of increased efficiency for all, and firms may try to shirk around the disclosure regulations. Assessing the real impact of transparency on efficiency is thus a relevant empirical question. However, and surprisingly, though the discussion about the benefits of transparency generally assumes that transparency exerts its benefits through increased efficiency, the two concepts have, to the best of our knowledge, not been discussed by measuring efficiency with frontier efficiency techniques. Our main contribution in this paper is thus to cross-breed the two strands of the literature, by measuring how transparency impact on bank efficiency. Moreover, to assess the impact of transparency on bank efficiency, one needs to measure transparency. To do so, we rely on transparency ratings delivered for Russian banks by Standard and Poor's on the basis of the real degrees of transparency these firms implement. Russia is a country of utmost interest to investigate the role of transparency for bank performance. The recent OECD report on Russia stresses the efforts made by the Central Bank of Russia to enhance transparency in the banking industry. As the country is still plagued by several institutional deficiencies which hamper banking development, one can wonder whether transparency, which is influenced by these deficiencies, matters for bank performance. To investigate the role of transparency on efficiency for Russian banks, we use the stochastic frontier approach to measure efficiency of Russian banks following former studies (e.g. Karas, Schoors and Weill, 2009). This technique estimates a cost frontier by assuming that observed cost deviated from the optimal cost by an error term which is the sum of a random disturbance and an inefficiency term. Data to obtain efficiency scores come from the agency Interfax and the Central Bank of Russia. We then proceed to regressions of cost efficiency scores on transparency measures. Our results tend to provide evidence of a beneficial role of transparency on cost efficiency of banks. Indeed, most transparency measures have a significantly positive coefficient in the regressions of efficiency scores. We therefore tend to support the view that transparency should be fostered to enhance bank efficiency.