Working Paper: CEPR ID: DP10614
Authors: Miguel Faria-e-Castro; Joseba Martinez; Thomas Philippon
Abstract: We characterize the optimal use of information disclosure and fiscal backstops during financial crises. In our model, financial crises force governments to choose between runs and lemons. Revealing information about banks? assets reduces adverse selection in credit markets, but it can also create inefficient runs on weak banks. A fiscal backstop mitigates this risk and allows the government to pursue a high disclosure strategy. A government with a strong fiscal position is more likely to run informative stress tests than a government with a weak fiscal position. As a result, such a government is also less likely to rely on outright bailouts.
Keywords: bailouts; credit guarantees; deposit insurance; fiscal backstop; stress tests
JEL Codes: E5; E6; G1; G2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased information disclosure about bank asset quality (G28) | Reduced adverse selection in credit markets (D82) |
| Increased information disclosure about bank asset quality (G28) | Increased risk of runs on weak banks (E44) |
| Strong fiscal capacity (E62) | More informative stress tests (C58) |
| More informative stress tests (C58) | Reduced necessity for bailouts (G28) |
| Low fiscal capacity (H69) | Less likelihood of information disclosure (D82) |
| Less likelihood of information disclosure (D82) | More frequent runs on banks (G21) |