EconPapers    
Economics at your fingertips  
 

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)
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 (12) Track citations by RSS feed

Downloads: (external link)
http://www.chicagofed.org/digital_assets/publicati ... s/2014/wp2014_04.pdf Full text (application/pdf)

Related works:
Working Paper: Mandatory Disclosure and Financial Contagion (2015) Downloads
Working Paper: Mandatory Disclosure and Financial Contagion (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedhwp:wp-2014-04

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Paper Series from Federal Reserve Bank of Chicago Contact information at EDIRC.
Bibliographic data for series maintained by ().

 
Page updated 2020-09-17
Handle: RePEc:fip:fedhwp:wp-2014-04