Research Discussion Papers, Bank of Finland
Optimal bank transparency
() and Tuomas Takalo
Abstract: Consider a competitive bank whose illiquid asset portfolio
is funded by short-term debt that has to be refinanced before the asset
matures. We show that in this setting maximal transparency is not socially
optimal, and that the existence of social externalities of bank failures
further lowers the optimal level of transparency. Moreover, asset risk
taking recedes as the level of transparency declines towards the socially
optimal level. As for the sign of the transparency impact on refinancing
risk, it is negative given the risk associated with the asset, but
ambiguous if one accounts for its indirect effect via risk taking.
Keywords: financial stability; information disclosure; market discipline; Basel III; global games; (follow links to similar papers)
JEL-Codes: D43; D82; G14; G21; G28; (follow links to similar papers)
32 pages, February 24, 2012
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- This paper is forthcoming as:
Moreno, Diego and Tuomas Takalo, 'Optimal bank transparency', Journal of Money, Credit and Banking.
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