Discussion Paper Details

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Title: Public Disclosure and Bank Failures

Author(s): Tito Cordella and Eduardo Levy Yeyati

Publication Date: May 1998

Keyword(s): bank failures, Deposit Insurance, information disclosure, Moral Hazard and Risk

Programme Area(s): Financial Economics

Abstract: This paper analyses the impact of public disclosure of banks? risk exposure on banks? risk taking incentives and its implications in terms of soundness of the banking system. We find that, when banks have a complete control over the volatility of their loan portfolio, public disclosure reduces the probability of banking crises. When asset risk is driven largely by exogenous factors beyond the control of bank managers, however, information disclosure may increase banking sector fragility, as the potential gains from a safer choice of assets is offset by the negative feed-back, arising from a positive correlation between asset risk and the deposit rate demanded by informed depositors.

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Bibliographic Reference

Cordella, T and Levy Yeyati, E. 1998. 'Public Disclosure and Bank Failures'. London, Centre for Economic Policy Research.