Optimal Bank Transparency Articles uri icon

publication date

  • February 2016

start page

  • 203

end page

  • 231

issue

  • 1

volume

  • 48

International Standard Serial Number (ISSN)

  • 0022-2879

Electronic International Standard Serial Number (EISSN)

  • 1538-4616

abstract

  • Increasing transparency is recurrently offered as a centerpiece of bank regulation. We study a competitive banking sector whose illiquid assets are funded by short-term debt that must be refinanced. We show that welfare is a nonmonotonic function of the level of transparency: Increasing transparency fosters efficient liquidation but has an adverse effect on rollover risk given the level of risk. Banks may compensate this adverse effect by taking more risk. These offsetting effects render an intermediate level of transparency optimal. Moreover, the existence of negative social externalities of bank failures calls for making banks more opaque rather than more transparent.

keywords

  • bank regulation; financial stability; information disclosure; rollover risk