The transparency of the banking industry and the efficiency of information-based bank runs
AbstractIn 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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Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 24/2005.
Length: 44 pages
Date of creation: 11 Oct 2005
Date of revision:
bank run; contagion; transparency; market discipline; deposit insurance;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-21 (All new papers)
- NEP-BAN-2006-10-21 (Banking)
- NEP-FIN-2006-10-21 (Finance)
- NEP-FMK-2006-10-21 (Financial Markets)
- NEP-IAS-2006-10-21 (Insurance Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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"Enhancing Bank Transparency: a Re-assessment,"
University of Helsinki, Department of Economics
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- Boot, Arnoud W A & Thakor, Anjan V, 2001.
"The Many Faces of Information Disclosure,"
Review of Financial Studies,
Society for Financial Studies, vol. 14(4), pages 1021-57.
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- 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.
- 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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