Information Disclosure and Bank Runs

George Pennacchi

Rodney L. White Center for Financial Research Working Papers from Wharton School Rodney L. White Center for Financial Research

Abstract: A simple model is constructed to analyze the effects of a "market discipline" strategy which ends de facto government insurance of legally uninsured depositors. This strategy can induce behavioral responses by bank managers and depositors which mitigate the amount of liability being shifted to uninsured depositors. Specifically, bank managers may adopt a policy of disclosing information regarding the bank's probability of default. This policy would enable uninsured depositors to withdraw when the probability of default rose, thereby avoiding liability for the negative net worth of the failed bank.

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