Transparency in the Financial System: Rollover Risk and Crises
56 Pages Posted: 17 Dec 2011 Last revised: 10 Sep 2014
Date Written: August 2014
We present a theory of optimal transparency when banks are exposed to rollover risk. Disclosing bank-specific information enhances the stability of the financial system during crises, but has a destabilizing effect in normal economic times. Thus, the regulator optimally increases transparency during crises. Under this policy, however, information disclosure signals a deterioration of economic fundamentals, which gives the regulator ex post incentives to withhold information. This commitment problem precludes a disclosure policy that provides ex ante optimal insurance against aggregate shocks, and can result in excess opacity that increases the likelihood of a systemic crisis.
Keywords: transparency, banking, rollover risk, stress tests, crises
JEL Classification: G21, G24, G01
Suggested Citation: Suggested Citation