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Bank transparency, asset and liquidity risks

Author

Listed:
  • Chen, Yehning
  • Hasan, Iftekhar
  • Takalo, Tuomas

Abstract

We study the effects of bank transparency on both banks' asset and liquidity risks, and ultimately, on banking sector stability and welfare. We show how enhanced bank transparency increases banks' vulnerability to excessive deposit outflows, but this threat of a liquidity crisis incentivizes banks to choose safer assets. We find that bank stability and welfare are a nonmonotonic function of transparency, and that they are maximized at an intermediate level of transparency, which is larger than the one preferred by banks but lower than what would result in excessive deposit outflows. Our model also suggests that bank transparency and deposit insurance are complementary policy tools, and that bank regulators should adjust disclosure requirements for banks procyclically

Suggested Citation

  • Chen, Yehning & Hasan, Iftekhar & Takalo, Tuomas, 2025. "Bank transparency, asset and liquidity risks," Bank of Finland Research Discussion Papers 4/2025, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:316423
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    More about this item

    Keywords

    bank transparency; bank runs; asset risk taking; banking stability; deposit insurance;
    All these keywords.

    JEL classification:

    • 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
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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