Working Paper: NBER ID: w21328
Authors: Fernando Alvarez; Gadi Barlevy
Abstract: This paper explores whether mandatory disclosure of bank balance sheet information can improve welfare. In our benchmark model, mandatory disclosure can raise welfare only when markets are frozen, i.e. when investors refuse to fund banks in the absence of balance sheet information. Even then, intervention is only warranted if there is sufficient contagion across banks, in a sense we make precise within our model. In the same benchmark model, if in the absence of balance sheet information investors would fund banks, mandatory disclosure cannot raise welfare and it will be desirable to forbid banks to disclose their financial positions. When we modify the model to allow banks to engage in moral hazard, mandatory disclosure can increase welfare in normal times. But the case for intervention still hinges on there being sufficient contagion. Finally, we argue disclosure represents a substitute to other financial reforms rather than complement them as some have argued.
Keywords: mandatory disclosure; financial contagion; bank welfare; moral hazard
JEL Codes: G01; G18; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank disclosure (G21) | welfare outcomes (I38) |
| mandatory disclosure (G38) | welfare (I38) |
| contagion (F65) | welfare (I38) |
| sufficient contagion (E44) | mandatory disclosure benefits (G18) |
| mandatory disclosure (G38) | undesirable outcomes (I12) |
| disclosure (G14) | other financial reforms (G28) |