Working Paper: CEPR ID: DP1886
Authors: Tito Cordelia; Eduardo Levy Yeyati
Abstract: This paper analyses the impact of public disclosure of banks? risk exposure on banks? risk taking incentives and its implications in terms of soundness of the banking system. We find that, when banks have a complete control over the volatility of their loan portfolio, public disclosure reduces the probability of banking crises. When asset risk is driven largely by exogenous factors beyond the control of bank managers, however, information disclosure may increase banking sector fragility, as the potential gains from a safer choice of assets is offset by the negative feed-back, arising from a positive correlation between asset risk and the deposit rate demanded by informed depositors.
Keywords: deposit insurance; bank failures; information disclosure; moral hazard; risk
JEL Codes: D28; G14; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Public disclosure of banks' risk exposures (G28) | Lowers the probability of bank failures (G21) |
| Risk-taking incentives (G11) | Lowers the probability of bank failures (G21) |
| Public disclosure of banks' risk exposures (G28) | Increases the probability of bank failures (F65) |
| Increased perceived risk (D81) | Higher deposit rates (E43) |
| Higher deposit rates (E43) | Increases the probability of bank failures (F65) |
| Public disclosure in developing economies exacerbates banking sector fragility (F65) | Increases the probability of bank failures (F65) |
| Nondisclosure (Y40) | Allows banks to manage risk more effectively (G21) |