Bank opacity and financial crises
No ADE2016/02, Economics Working Papers from European University Institute
This paper studies a model of endogenous bank opacity. In the model, bank opacity is costly for society because it reduces market discipline and encourages banks to take on too much risk. This is true even in the absence of agency problems between banks and the ultimate bearers of the risk. Banks choose to be inefficiently opaque if the composition of a bank’s balance sheet is proprietary information. Strategic behavior reduces transparency and increases the risk of a banking crisis. The model can explain why empirically a higher degree of bank competition leads to increased transparency. Optimal public disclosure requirements may make banks more vulnerable to a run for a given investment policy, but they reduce the risk of a run through an improvement in market discipline. The option of public stress tests is beneficial if the policy maker has access to public information only. This option can be harmful if the policy maker has access to banks’ private information.
Keywords: bank opacity; bank runs; market discipline; bank competition; stress tests (search for similar items in EconPapers)
JEL-codes: E44 G14 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cfn
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