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Optimal bank transparency

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Author Info

  • Moreno, Diego

    ()
    (Departamento de Economía, Universidad Carlos III de Madrid)

  • Takalo , Tuomas

    ()
    (Bank of Finland Research)

Abstract

Consider a competitive bank whose illiquid asset portfolio is funded by short-term debt that has to be refinanced before the asset matures. We show that in this setting maximal transparency is not socially optimal, and that the existence of social externalities of bank failures further lowers the optimal level of transparency. Moreover, asset risk taking recedes as the level of transparency declines towards the socially optimal level. As for the sign of the transparency impact on refinancing risk, it is negative given the risk associated with the asset, but ambiguous if one accounts for its indirect effect via risk taking.

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File URL: http://www.suomenpankki.fi/en/julkaisut/tutkimukset/keskustelualoitteet/Documents/BoF_DP_1209.pdf
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Bibliographic Info

Paper provided by Bank of Finland in its series Research Discussion Papers with number 9/2012.

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Length: 32 pages
Date of creation: 24 Feb 2012
Date of revision:
Handle: RePEc:hhs:bofrdp:2012_009

Contact details of provider:
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: financial stability; information disclosure; market discipline; Basel III; global games;

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  1. Stephen Morris & Hyun Song Shin, 2003. "Catalytic Finance: When Does It Work?," Cowles Foundation Discussion Papers 1400, Cowles Foundation for Research in Economics, Yale University.
  2. Xavier Freixas & Gyongyi Loranth & Alan D. Morrison & Hyun Song Shin, 2004. "Regulating Financial Conglomerates," Working Paper Research 54, National Bank of Belgium.
  3. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  4. Hyytinen, Ari & Takalo, Tuomas, 2000. "Enhancing Bank Transparency: A Re-assessment," Research Discussion Papers 10/2000, Bank of Finland.
  5. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," NBER Working Papers 10391, National Bureau of Economic Research, Inc.
  6. Eduardo Levy Yeyati & Tito Cordella, 1997. "Public Disclosure and Bank Failures," IMF Working Papers 97/96, International Monetary Fund.
  7. Huang, Pidong, 2013. "Suspension in a Global-Games version of the Diamond-Dybvig model," MPRA Paper 46622, University Library of Munich, Germany.
  8. Giannetti, Mariassunta, 2007. "Financial liberalization and banking crises: The role of capital inflows and lack of transparency," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 32-63, January.
  9. Augustin Landier & David Thesmar, 2011. "Regulating Systemic Risk through Transparency: Tradeoffs in Making Data Public," NBER Working Papers 17664, National Bureau of Economic Research, Inc.
  10. Itay Goldstein & Ady Pauzner, 2005. "Demand-Deposit Contracts and the Probability of Bank Runs," Journal of Finance, American Finance Association, vol. 60(3), pages 1293-1327, 06.
  11. Calomiris, Charles W & Kahn, Charles M, 1991. "The Role of Demandable Debt in Structuring Optimal Banking Arrangements," American Economic Review, American Economic Association, vol. 81(3), pages 497-513, June.
  12. Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers 283, UCLA Department of Economics.
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