Precision of public information disclosures, banks' stability and welfare

We study the optimal precision of public information disclosures about banksíassets quality. In our model the precision of information a§ects banksí cost of raising funding and asset proÖle riskiness. In an imperfectly competitive banking sector, banksístability and social surplus are non-monotonic functions of precision: an intermediate precision (or low-to-intermediate precision if banks contract their repayment promises on public information) maximizes stability, and also yields the maximum surplus when the social cost of bank failure c is large. When c is small and the banksíasset risk taking is not too sensitive to changes in the precision, the maximum surplus (and maximum risk) are reached at maximal precision. In a perfectly competitive banking sector in which banksíasset risk taking is not too sensitive to the precision of information, the maximum surplus (and maximum risk) are reached at maximal precision, while maximum stability is reached at minimal precision.