Research Discussion Papers, Bank of Finland
No 24/2005:
The transparency of the banking industry and the efficiency of information-based bank runs
Yehning Chen and Iftekhar Hasan ()
Abstract: In this paper, we investigate the relationship between the
transparency of banks and the fragility of the banking system. We show that
information-based bank runs may be inefficient because the deposit
con-tract designed to provide liquidity induces depositors to have
excessive incentives to withdraw. An im-provement in transparency of a bank
may reduce depositor welfare through increasing the chance of an
inefficient contagious bank run on other banks. A deposit insurance system
in which some depositors are fully insured and the others are partially
insured can ameliorate this inefficiency. Under such a system, bank runs
can serve as an efficient mechanism for disciplining banks. We also
consider bank managers’ control over the timing of information disclosure,
and find that they may lack the incentive to reveal in-formation about
their banks.
Keywords: bank run; contagion; transparency; market discipline; deposit insurance; (follow links to similar papers)
JEL-Codes: G21; G28; (follow links to similar papers)
44 pages, October 11, 2005
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