Transparency in the financial system: rollover risk and crises

The paper presents a theory of optimal transparency in the nancial system when nancial institutions have short-term liabilities and are exposed to rollover risk. Our analysis indicates that transparency enhances the stability of the - nancial system during crises but may have a destabilizing e ect during normal economic times. Thus, the optimal level of transparency is contingent on the state of the economy, with the regulator increasing disclosure in times of crises. Under this policy, however, an increase in disclosure signals a deterioration of the economy's fundamentals, so the regulator has incentives to withhold information ex-post. In that case, the regulator may have to commit ex-ante to a degree of transparency which trades o the frequency and magnitude of nancial crises. The analysis also considers the possibility that nancial institutions, in an attempt to deal with rollover risk, either diversify their risks or increase the liquidity of their balance sheets.