Discussion Paper Details

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Title: Runs versus Lemons: Information Disclosure and Fiscal Capacity

Author(s): Miguel Faria-e-Castro, Joseba Martinez and Thomas Philippon

Publication Date: May 2015

Keyword(s): bailouts, credit guarantees, deposit insurance, fiscal backstop and stress tests

Programme Area(s): Financial Economics and International Macroeconomics

Abstract: We characterize the optimal use of information disclosure and fiscal backstops during financial crises. In our model, financial crises force governments to choose between runs and lemons. Revealing information about banks? assets reduces adverse selection in credit markets, but it can also create inefficient runs on weak banks. A fiscal backstop mitigates this risk and allows the government to pursue a high disclosure strategy. A government with a strong fiscal position is more likely to run informative stress tests than a government with a weak fiscal position. As a result, such a government is also less likely to rely on outright bailouts.

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Bibliographic Reference

Faria-e-Castro, M, Martinez, J and Philippon, T. 2015. 'Runs versus Lemons: Information Disclosure and Fiscal Capacity'. London, Centre for Economic Policy Research.