Mandatory Disclosure and Financial Contagion

Fernando Alvarez and Gadi Barlevy

No WP-2014-4, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: This paper analyzes the welfare implications of mandatory disclosure of losses at financial institutions when it is common knowledge that some banks have incurred losses but not which ones. We develop a model that features contagion, meaning that banks not hit by shocks may still suffer losses because of their exposure to banks that are. In addition, we assume banks can profitably invest funds provided by outsiders, but will divert these funds if their equity is low. Investors thus value knowing which banks were hit by shocks to assess the equity of the banks they invest in. We find that when the extent of contagion is large, it is possible for no information to be disclosed in equilibrium but for mandatory disclosure to increase welfare by allowing investment that would not have occurred otherwise. Absent contagion, mandatory disclosure cannot raise welfare, even if markets are frozen.

Keywords: Information; Networks; Contagion; Stress Tests (search for similar items in EconPapers)
JEL-codes: G01 G14 G17 (search for similar items in EconPapers)
Pages: 58 pages
Date: 2014-04-28
New Economics Papers: this item is included in nep-ban, nep-cba and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Related works:
Journal Article: Mandatory disclosure and financial contagion (2021)
Working Paper: Mandatory Disclosure and Financial Contagion (2015)
Working Paper: Mandatory Disclosure and Financial Contagion (2014)
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