Optimal Bank Transparency

Diego Moreno, Tuomas Takalo
2012 Social Science Research Network  
Increasing transparency is recurrently offered as a centerpiece of bank regulation. We study a competitive banking sector whose illiquid assets are funded by short-term debt that must be refinanced. We show that welfare is a nonmonotonic function of the level of transparency: Increasing transparency fosters efficient liquidation but has an adverse effect on rollover risk given the level of risk. Banks may compensate this adverse effect by taking more risk. These offsetting effects render an
more » ... rmediate level of transparency optimal. Moreover, the existence of negative social externalities of bank failures calls for making banks more opaque rather than more transparent. JEL codes: E58, G14, G21, G28
doi:10.2139/ssrn.2016090 fatcat:mboc2t2cuzagnicrlfnotgdf6e