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Banking and Transparency: Is More Information Always Better?

  • Nicole Allenspach
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    This paper shows that transparency in banking can be harmful from a social planner's point of view. According to our model, enhancing transparency above a certain level may lead to the inefficient liquidation of a bank. The reason lies in the nature of a standard deposit contract: its payoff scheme has limited upside gains (cap) but leaves the depositor with the downside risk. Accordingly, depositors will not take into account possible future upside gains of the bank when deciding whether or not to withdraw their deposits. Our result points towards a trade-off the regulator faces: while enhancing transparency may be useful to reduce incentives for excessive risk-taking (moral hazard), it may also increase the risk of inefficient bank runs.

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    File URL: http://www.snb.ch/n/mmr/reference/working_paper_2009_11/source/working_paper_2009_11.n.pdf
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    Paper provided by Swiss National Bank in its series Working Papers with number 2009-11.

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    Length: 35 pages
    Date of creation: 2009
    Date of revision:
    Handle: RePEc:snb:snbwpa:2009-11
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    1. Eduardo Levy Yeyati & Tito Cordella, 1997. "Public Disclosure and Bank Failures," IMF Working Papers 97/96, International Monetary Fund.
    2. Ari Hyytinen & Tuomas Takalo, 2004. "Preventing Systemic Crises through Bank Transparency," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 33(2), pages 257-273, 07.
    3. Hyytinen, Ari & Takalo, Tuomas, 2002. "Enchancing Bank Transparency : A Re-assessment," Discussion Papers 828, The Research Institute of the Finnish Economy.
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