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Optimal bank transparency

  • Moreno, Diego

    ()

    (Departamento de Economía, Universidad Carlos III de Madrid)

  • Takalo , Tuomas

    ()

    (Bank of Finland Research)

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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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:
Publication status: Forthcoming as Moreno, Diego and Tuomas Takalo, 'Optimal bank transparency' in Journal of Money, Credit and Banking .
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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  1. Morris, Stephen & Shin, Hyun Song, 1998. "Unique Equilibrium in a Model of Self-Fulfilling Currency Attacks," American Economic Review, American Economic Association, vol. 88(3), pages 587-97, June.
  2. 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.
  3. George-Marios Angeletos & Alessandro Pavan, 2004. "Transparency of Information and Coordination in Economies with Investment Complementarities," Discussion Papers 1494, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  4. Chen, Yehning & Hasan, Iftekhar, 2006. "Why do bank runs look like panic? A new explanation," Research Discussion Papers 19/2006, Bank of Finland.
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  7. Hyytinen, A. & Takalo, T., 2000. "Enhancing Bank Transparency: a Re-assessment," University of Helsinki, Department of Economics 492, Department of Economics.
  8. 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.
  9. Freixas, Xavier & Lóránth, Gyöngyi & Morrison, Alan, 2005. "Regulating Financial Conglomerates," CEPR Discussion Papers 5036, C.E.P.R. Discussion Papers.
  10. 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.
  11. 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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  13. Huang, Pidong, 2013. "Suspension in a Global-Games version of the Diamond-Dybvig model," MPRA Paper 46622, University Library of Munich, Germany.
  14. 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.
  15. Matutes, Carmen & Vives, Xavier, 1996. "Competition for Deposits, Fragility, and Insurance," Journal of Financial Intermediation, Elsevier, vol. 5(2), pages 184-216, April.
  16. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  17. 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.
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