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Banking and Transparency: Is More Information Always Better?

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  • Nicole Allenspach

Abstract

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.

Suggested Citation

  • Nicole Allenspach, 2009. "Banking and Transparency: Is More Information Always Better?," Working Papers 2009-11, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2009-11
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    File URL: https://www.snb.ch/n/mmr/reference/working_paper_2009_11/source/working_paper_2009_11.n.pdf
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    References listed on IDEAS

    as
    1. Ari Hyytinen & Tuomas Takalo, 2002. "Enhancing Bank Transparency: A Re-assessment," Review of Finance, European Finance Association, vol. 6(3), pages 429-445.
    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, July.
    3. Tito Cordella & Eduardo Levy Yeyati, 1998. "Public Disclosure and Bank Failures," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 110-131, March.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    banking; transparency; financial stability; bank run;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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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