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Transparency in the financial system: rollover risk and crises

  • Matthieu Bouvard

    ()

  • Pierre Chaigneau

    ()

  • Adolfo de Motta

    ()

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    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.

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    Paper provided by Financial Markets Group in its series FMG Discussion Papers with number dp700.

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    Date of creation: Feb 2012
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    Handle: RePEc:fmg:fmgdps:dp700
    Contact details of provider: Web page: http://www.lse.ac.uk/fmg/

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    1. Jean-Charles Rochet & Xavier Vives, 2002. "Coordination failures and the lender of last resort: was Bagehot right after all?," LSE Research Online Documents on Economics 24928, London School of Economics and Political Science, LSE Library.
    2. Chakraborty, Archishman & Harbaugh, Rick, 2007. "Comparative cheap talk," Journal of Economic Theory, Elsevier, vol. 132(1), pages 70-94, January.
      • Archishman Chakraborty & Rick Harbaugh, 2004. "Comparative Cheap Talk," Working Papers 2004-08, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    3. Guillaume Plantin, 2009. "Learning by Holding and Liquidity," Review of Economic Studies, Oxford University Press, vol. 76(1), pages 395-412.
    4. repec:bla:restud:v:76:y:2009:i:1:p:395-412 is not listed on IDEAS
    5. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
    6. Chen, Qi & Goldstein, Itay & Jiang, Wei, 2010. "Payoff complementarities and financial fragility: Evidence from mutual fund outflows," Journal of Financial Economics, Elsevier, vol. 97(2), pages 239-262, August.
    7. Acharya, Viral V & Gale, Douglas M & Yorulmazer, Tanju, 2009. "Rollover Risk and Market Freezes," CEPR Discussion Papers 7122, C.E.P.R. Discussion Papers.
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