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The transparency of the banking industry and the efficiency of information-based bank runs

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Author Info

  • Chen, Yehning

    (National Taiwan University)

  • Hasan, Iftekhar

    ()
    (Rensselaer Polytechnic Institute and Bank of Finland)

Abstract

In this paper, we investigate the relationship between the transparency of banks and the fragility of the banking system. We show that information-based bank runs may be inefficient because the deposit con-tract designed to provide liquidity induces depositors to have excessive incentives to withdraw. An im-provement in transparency of a bank may reduce depositor welfare through increasing the chance of an inefficient contagious bank run on other banks. A deposit insurance system in which some depositors are fully insured and the others are partially insured can ameliorate this inefficiency. Under such a system, bank runs can serve as an efficient mechanism for disciplining banks. We also consider bank managers’ control over the timing of information disclosure, and find that they may lack the incentive to reveal in-formation about their banks.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/0524netti.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 24/2005.

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Length: 44 pages
Date of creation: 11 Oct 2005
Date of revision:
Handle: RePEc:hhs:bofrdp:2005_024

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Postal: Bank of Finland, P.O. Box 160, FI-00101 Helsinki, Finland
Web page: http://www.suomenpankki.fi/en/
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Related research

Keywords: bank run; contagion; transparency; market discipline; deposit insurance;

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References

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  1. Hyytinen, Ari & Takalo, Tuomas, 2000. "Enhancing Bank Transparency: A Re-assessment," Research Discussion Papers 10/2000, Bank of Finland.
  2. Arnoud W. A. Boot & Anjan V. Thakor, 1998. "The Many Faces of Information Disclosure," William Davidson Institute Working Papers Series 80, William Davidson Institute at the University of Michigan.
  3. Admati, Anat R & Pfleiderer, Paul, 2000. "Forcing Firms to Talk: Financial Disclosure Regulation and Externalities," Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 479-519.
  4. Kevin C. Murdock & Thomas F. Hellmann & Joseph E. Stiglitz, 2000. "Liberalization, Moral Hazard in Banking, and Prudential Regulation: Are Capital Requirements Enough?," American Economic Review, American Economic Association, vol. 90(1), pages 147-165, March.
  5. V.V. Chari & Ravi Jagannathan, 1984. "Banking Panics," Discussion Papers 618, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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