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Bank opacity and financial crises

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  • Jungherr, Joachim

Abstract

This paper studies a model of endogenous bank opacity. Why do banks choose to hide their risk exposure from the public? And should policy makers force banks to be more transparent? In the model, bank opacity is costly because it encourages banks to take on too much risk. But opacity also reduces the incidence of bank runs (for a given level of risk taking). Banks choose to be inefficiently opaque if the composition of their asset holdings is proprietary information. In this case, policy makers can improve upon the market outcome by imposing public disclosure requirements (such as Pillar Three of Basel II). However, full transparency maximizes neither efficiency nor stability. The model can explain why empirically a higher degree of bank competition leads to increased transparency.

Suggested Citation

  • Jungherr, Joachim, 2018. "Bank opacity and financial crises," Journal of Banking & Finance, Elsevier, vol. 97(C), pages 157-176.
  • Handle: RePEc:eee:jbfina:v:97:y:2018:i:c:p:157-176
    DOI: 10.1016/j.jbankfin.2018.09.022
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    3. Tram-Anh Nguyen & Phu Ha Nguyen & Hiep Ngoc Luu & Trang Nguyen Ha Cu & Phuong-Anh Nguyen, 2023. "Bank provisioning practice during the pandemic: evidence from the COVID-19 outbreak," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 20(3), pages 248-260, September.
    4. Catão, Luís A.V. & te Kaat, Daniel Marcel, 2021. "Capital account liberalization and the composition of bank liabilities," Journal of International Money and Finance, Elsevier, vol. 116(C).
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    6. Ryuichiro Izumi, 2021. "Opacity: Insurance and Fragility," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 40, pages 146-169, April.
    7. Kim, Jinyong & Kim, Mingook & Lee, Jeong Hwan, 2019. "The effect of TARP on loan loss provisions and bank transparency," Journal of Banking & Finance, Elsevier, vol. 102(C), pages 79-99.
    8. García, Raffi E. & Steele, Suzanne, 2022. "Stress testing and bank business patterns: A regression discontinuity study," Journal of Banking & Finance, Elsevier, vol. 135(C).
    9. Abad, Pilar & Robles, M.-Dolores & Alonso Orts, Carlos, 2023. "Stress testing programs and credit risk opacity of banks: USA vs Europe," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    10. repec:zbw:bofitp:2020_002 is not listed on IDEAS
    11. Lartey, Theophilus & James, Gregory A. & Danso, Albert & Boateng, Agyenim, 2022. "Bank business models, failure risk and earnings opacity: A short- versus long-term perspective," International Review of Financial Analysis, Elsevier, vol. 80(C).
    12. Badarau, Cristina & Lapteacru, Ion, 2020. "Bank risk, competition and bank connectedness with firms: A literature review," Research in International Business and Finance, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    Bank opacity; Bank runs; Bank risk taking;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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

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