Bank capital is similar to transparency in that market discipline results in race to top

Bloomberg reports that Sweden has triggered a race to the top in bank capital.  The reason this has occurred is market discipline.  Markets encourage more capital by providing funds to banks with more capital cheaply and discourage banks having less capital by providing funds more expensively.

The same market discipline would also reward banks that provided ultra transparency and punish banks that hid their risk behind a veil of opacity.

The reward for disclosing on an ongoing basis a bank's current global asset, liability and off-balance sheet exposure details would be much greater than it is for simply reporting higher capital levels.

The reason is that without ultra transparency, the bank is still a 'black box' that the investors are blindly gambling on.

Since Swedish regulators told their banks to target minimum capital buffers equivalent to 12 percent of their risk-weighted assets, banks across Europe have faced pressure to converge up in a race to the top.... 

Clausen, who is also the chief executive officer at Stockholm-based Nordea Bank AB, says Europe’s capital requirements need to become more uniform to be effective. 

And as banks with the highest regulatory buffers enjoy lower funding costs, the industry’s biggest association in Europe is signaling that the benefits of converging up may outweigh the costs of setting aside extra reserves....

It is nice to see Professor Anat Admati's argument that bank's holding more capital will have a lower cost of funding proven by the banks.

Nordea’s core Tier 1 capital ratio reached 13.1 percent of risk-weighted assets at the end of last year, while Swedbank AB’s was 17.4 percent and SEB AB’s 15.1 percent. Svenska Handelsbanken AB had a ratio of 18.4 percent in the final three months of 2012. The results put Sweden’s biggest banks at the top of capital rankings in the European Union. 

Danske Bank A/S, Denmark's largest bank, in October last year sold 93 million new shares, generating gross proceeds of 7 billion kroner ($1.2 billion). 

The move was aimed at helping the bank raise its capital ratio and improve its credit ratings in a bid to lower its funding costs, which have been higher relative to its better-capitalized Swedish rivals.

I always like a race to the top driven by market discipline.

Investors have rewarded the lenders for the perceived extra hedge against losses. 

It costs about 12 basis points less to insure against losses on senior notes issued by Nordea than it does for equivalent securities sold by Deutsche Bank AG, using five-year credit default swaps. Handelsbanken default-swaps trade 36 basis points lower.