Public Disclosure and Bank Failures
by Tito Cordella of the International Monetary Fund, and
Abstract: We study how public disclosure of banks' risk exposure affects banks' risk taking incentives and assesses the impact of the presence of informed depositors on the soundness of the banking system. We find that when banks have complete control over the volatility of their loan portfolio, public disclosure reduces the probability of banking crisis. However, when banks do not control their risk exposure, the presence of informed depositors may increase the probability of bank failures.
Published in: IMF, Staff Papers, Vol. 45, No. 1, (March 1998), pp. 110-131.