Bank Disclosure and Market Assessment of Financial Fragility: Evidence from Banks Equity Prices

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Bank Disclosure and Market Assessment of
Financial FragilityEvidence from Banks Equity
Prices
Discussant Halit Gonenc Faculty of Economics and
Business Department of Finance Centre for
International Banking, Insurance and Finance
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• Brief Summary
• Investigation of stock market responses to
  changes in indicators of Turkish banks financial
  fragility during the years before the major
  economic crisis.
• Indicators Changes in non-performing loans
  (NPL), maturity mismatch (MM), currency mismatch
  (Currency), earnings, the amount of government
  securities (GS) along with the ex-post changes in
  interest rates.
• Motivation If the market responses to these
  changes, this will be indication of the
  relationship between market monitoring and banks
  safety and soundness (market discipline and bank
  disclosure).
• Unbalanced quarterly data from 1992.Q1 to
  2001.Q2.
• Stock returns are sensitive to changes in MM,
  Currency, and earnings.
• The quality of disclosure is important Market
  reaction is stronger for non-auditing quarters
  and for disclosure with shorter reporting lags
  (timeliness). Bank act in 1999 has an affect on
  non-auditing disclosures.

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• Strong Points
• Very interesting and important subject to
  consider the monitoring issue by measuring the
  quality of disclosure of banks financial tables.
• Main indicators to measure banks safety and
  soundness.
• Turkish economy is very sensitive to the
  financial structure of banks.
• Hard work on collecting the required data for
  indicators.
• Several steps to understand the important issues
  in the relationship market responses and
  indicators.
• Several tests to robust the value relevance
  results.

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• Weaknesses
• Sample covers all public banks, but it is not a
  good representative of the whole Turkish banking
  system (only 37 of assets in the industry).
• Small sample size with major indicators.
• Disclosure date may not be a good indication of
  unexpected news.
• Ex-ante changes in the indicators versus
  unexpected changes (connected with an
  announcement-earnings).
• Ex-post changes in the interest rate (realized
  change) versus unexpected changes.
• Missing discussion on how these proxies would be
  sufficient for the economic meanings of the
  findings.
• Benchmark problem ISE-100 index.
• The effect of real exchange rate changes on
  currency mismatch are omitted. Missing
  information for off-balance sheet hedging
  activities for several banks.
• Outliers 12 month increasing and 11 month
  decreasing (quarterly) as maximum and minimum
  changes in in maturity mismatch.

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• Major Concerns
• Market reaction versus monitoring on banks
  safety and soundness!
• Can a significant market reaction be considered
  as market monitoring?
• More argument or evidence should be provided.
• After a significant price changes, do regulators
  take more action on banks immediately, or do
  managers change their policies on their major
  financing or credit activities?
• Ownership structure of banks is very important
  and needs to be considered in the discussion.
• Who would be the one to perform better monitoring
  to control bank managements strategy ?
• Market performance of banks shares would be
  important for new equity financing. Main
  financing providers are depositors (protected by
  regulatory agencies) and other financial
  institutions (syndicate credits) who seem very
  important monitors (especially for Turkish
  banks).

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• Weak Evidence from Analyses
• Table 4 based on univariate analysis (even with
  one tail test) does not provide any significant
  differences in the CARs between the two
  distinctive groups Changes providing good news
  and changes proving bad news.
• Market were not able to differentiate the good
  and bad news.
• If this is the case, what would be the meaning
  from the statement that returns are sensitive to
  increasing or decreasing in changes of
  indicators?
• The first one is more important, and needs to
  provide a significant results.

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Good luckThank you for your attention