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Bank opacity and financial crises

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  • Jungherr, Joachim

Abstract

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.

Suggested Citation

  • Jungherr, Joachim, 2016. "Bank opacity and financial crises," Economics Working Papers ADE2016/02, European University Institute.
    • Handle: RePEc:eui:euiwps:ade2016/02
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    More about this item

    Keywords

    bank opacity; bank runs; market discipline; bank competition; stress tests;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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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