Sponsor:
We gratefully acknowledge financial support from the Spanish Ministry of Education, grant ECO2011-29762. Takalo also thanks the Yrjö Jahnsson Foundation for funding
Project:
Gobierno de España. ECO2011-29762
Keywords:
Bank regulation
,
Financial stability
,
Information disclosure
,
Rollover risk
Increasing transparency is recurrently offered as a centerpiece of bank regulation. We study a competitive banking sector whose illiquid assets are funded by short-term debt that must be refinanced. We show that welfare is a nonmonotonic function of the level Increasing transparency is recurrently offered as a centerpiece of bank regulation. We study a competitive banking sector whose illiquid assets are funded by short-term debt that must be refinanced. We show that welfare is a nonmonotonic function of the level of transparency: Increasing transparency fosters efficient liquidation but has an adverse effect on rollover risk given the level of risk. Banks may compensate this adverse effect by taking more risk. These offsetting effects render an intermediate level of transparency optimal. Moreover, the existence of negative social externalities of bank failures calls for making banks more opaque rather than more transparent.[+][-]