Download This PaperBanking and Transparency: Is More Information Always Better?
Swiss National Bank Working Papers 2009-11
35 Pages Posted: 17 Dec 2009
Date Written: September 2009
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.
Keywords: banking, transparency, financial stability, bank run
JEL Classification: G21, G28, D82
Suggested Citation: Suggested Citation
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