Jungherr, Joachim, (2016), “Bank opacity and financial crises”, ADEMU WP 2016/002, February
This paper studies a model of endogenous bank opacity. In the model, bank opacity is costly for society because it reduces market discipline and encourages banks to take on too much risk. This is true even in the absence of agency problems between banks and the ultimate bearers of the risk. Banks choose to be inefficiently opaque if the composition of a bank’s balance sheet is proprietary information. Strategic behavior reduces transparency and increases the risk of a banking crisis. The model can explain why empirically a higher degree of bank competition leads to increased transparency. Optimal public disclosure requirements may make banks more vulnerable to a run for a given investment policy, but they reduce the risk of a run through an improvement in market discipline. The option of public stress tests is beneficial if the policy maker has access to public information only. This option can be harmful if the policy maker has access to banks’ private information.
Relevant Posts
- Cukierman, Alex, (2016), “Global Crisis in the US vs the Eurozone: Banks and monetary policy”, VoxEu, 16 April
- Fratzscher, Marcel, Rieth, Malte, (2015), “Monetary Policy, Bank Bailouts and the Sovereign-bank Risk Nexus in the Euro Area”, European Commission Directorate-General for Economic and Financial Affairs, DISCUSSION PAPER 009, September 2015