DP1886 Public Disclosure and Bank Failures

Author(s): Tito Cordella, Eduardo Levy Yeyati
Publication Date: May 1998
Keyword(s): bank failures, Deposit Insurance, information disclosure, Moral Hazard, Risk
JEL(s): D28, G14, G21, G28
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1886

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.