Scandinavian Working Papers in Economics
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Bank of Finland Research Discussion Papers, Bank of Finland

No 9/2012:
Optimal bank transparency

Diego Moreno () 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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