The paper "Bank Transparency under Scrutiny: Assessing the COVID-19 Moratoria Program" by Sara Longo, assistant professor in Accounting, and Prof. Claudia Curi, associate professor in Finance and Banking at the Faculty of Economics and Management, was presented and awarded at the 14th Financial Reporting Workshop, recently held at the Catholic University of Milan. In the following interview, Longo explains the research project.

Sara Longo, what was the starting point of your research?

We started by looking at the COVID-19 Moratoria program, which allowed banks to grant various payment holidays to 'good' borrowers. This was designed to support businesses and households that were facing income constraints and would not have been able to repay their loans at the time. The potential inability of these borrowers to repay their loans could have destabilized banks and threatened the stability of the entire banking system. Financial stability is the foundation of a healthy economy and, therefore, a key priority for policymakers and financial institutions. This is why governments acted to provide the necessary support. However, financial stability is closely related to bank transparency, i.e. the information disclosed by banks, including the nature and extent of the risks to which the bank is exposed. This research study aims to understand the extent to which the moratoria program, which incentivised banks to 'freeze' information about their risks, affected bank transparency and, ultimately, bank stability. This is not a trivial question.

We learned from the last financial crisis in 2008 that having transparent banks also means having more stable ones. In the case of the moratorium, the priority was the financial stability of credit institutions. But what about transparency?

We know that transparency plays an important role in the soundness of banks, as it provides information on various aspects of banks, such as business models, financial reporting and corporate governance practices. This transparency helps investors, depositors and regulators to better understand the bank and make more informed decisions. A lack of it can lead, for example, to reduced investor confidence, increased risk, higher borrowing costs, fraud and mismanagement. This was the main lesson from the 2008 financial crisis. Our study aims to test whether bank transparency could be changed by this specific intervention, which primarily supports borrowers, as low transparency could threaten future financial stability. Measuring transparency is complex from an accounting perspective as it does not have a direct measure. We measure it by relying on estimating appropriate statistical techniques to derive this measure. We use financial accounting data retrieved from public sources and collected from the listed European banks’ annual reports covering 2020-2022 in order to distinguish between banks that adhered to the program and those that did not, as participation was not mandatory.

And what is the interpretation of this transparency proxy?

If it is low, it means that the bank is not transparent; otherwise, it is. We verified the level of bank transparency among a sample of 55 listed European banks and found that 39 banks participated in the amount of loans under Moratoria, while 16 did not. By employing a model that allows us to compare the differences between these two groups of banks, we find that only the banks joining the moratoria program experience a decline in transparency.

What are the economic implications of these results?

We interpret our results as follows. By joining the Moratoria program, banks relax their loan quality monitoring activity. Thus, transparency decreases if a bank interrupts monitoring its customers closely, even just by suspending their monthly payments for a short, definite time. Our results differ from one strand of the literature, which argues that bank transparency increases whenever the distinction between good and bad loans is obvious.  This does not happen, although only good borrowers with performing loans were eligible to join the moratoria program. In addition, since the decision to join the moratorium depends on borrowers' willingness, the relationship between lenders and borrowers is much more intense, which could have increased banks' transparency again.

Will your research on this subject continue?

Yes, for sure. Indeed, the next step is to examine whether this reduction in transparency has allowed banks to effectively maintain financial stability, which was the main objective of governments at the time of the pandemic. We aim to provide results and policy recommendations that will be useful to policymakers, regulators and practitioners regarding the moratoria program and the soundness of the banking sector. This is important because informed decisions can help ensure financial stability, protect the interests of borrowers and investors, and promote economic resilience during times of crisis. We are finalizing our paper with further analyses. We aim to submit it very soon to a scientific journal that focuses on banking and accounting issues.

(zil)