Better transparency contributes to economic development and reduces the risks of financial crises
Economic Commentaries, News A lack of transparency at banks can lead to lower trust and problems for the entire financial system. During the financial crisis, banks’ risks could not be sufficiently well observed and measured. Since then, transparency requirements have been regulated, but new risks that need to be taken into account, such as climate risks, are emerging all the time.
This Economic Commentary describes the evolution of transparency in the global banking system, why transparency is important, and the effects of insufficient transparency on financial stability. Advisor Niklas Frykström, who has written the report, also discusses the current work being done by banks regarding climate risks.
Trust between counterparties requires access to accurate information that is relevant and understandable. Financial agents need to have an accurate view of the risks involved when engaging with a counterparty. For a long time, the Riksbank has played a driving role and advocated improved transparency requirements for the major Swedish banks with regard to various financial risks. One of the Riksbank’s tools is the Financial Stability Report, in which we, for example, have given recommendations and described how well the major Swedish banks have fulfilled liquidity measures. Regarding doubtful loans, the Riksbank has emphasised that transparency should increase so that investors can better understand the risks and quality of the banks' loan portfolios.
Important to have global standardisation and harmonisation regarding sustainability and climate
The Riksbank would also like to see improved transparency regarding climate-related risks. Internationally, several projects are ongoing aimed at increasing transparency on risks regarding sustainability and climate, for example extended reporting and comparable standardised information. But it is unclear which requirements apply, with several ongoing parallel international sustainability standards. It is therefore important that the various authorities, banks and organisations developing the new regulations work together to ensure that the information is useful and understandable to stakeholders.
By disclosing their exposures to climate risks, banks play an important role here. The major Swedish banks currently compile sustainability reports, which is a step in the right direction. But more can be done regarding, for example, climate footprint and related key indicators used to assess the development of sustainability.
An effective transparency framework supports the climate transition and can eventually enable better and greener investments. Improved transparency provides incentives for banks not to take too much risk and reduces the likelihood of stress in one part of the banking system spreading to other parts.
Niklas Frykström: The author works at the Riksbank's Financial Stability Department