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Cryptography and the Economics of Supervisory Information: Balancing Transparency and Confidentiality

48 Pages Posted: 15 Nov 2013  

Mark D. Flood

Government of the United States of America - Office of Financial Research

Jonathan Katz

University of Maryland Department of Computer Science

Stephen J. Ong

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Adam D. Smith

Pennsylvania State University

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Date Written: September 10, 2013

Abstract

We elucidate the tradeoffs between transparency and confidentiality in the context of financial regulation. The structure of information in financial contexts creates incentives with a pervasive effect on financial institutions and their relationships. This includes supervisory institutions, which must balance the opposing forces of confidentiality and transparency that arise from their examination and disclosure duties. Prudential supervision can expose confidential information to examiners who have a duty to protect it. Disclosure policies work to reduce information asymmetries, empowering investors and fostering market discipline. The resulting confidentiality/transparency dichotomy tends to push supervisory information policies to one extreme or the other. We argue that there are important intermediate cases in which limited information sharing would be welfare-improving, and that this can be achieved with careful use of new techniques from the fields of secure computation and statistical data privacy. We provide a broad overview of these new technologies. We also describe three specific usage scenarios where such beneficial solutions might be implemented.

Suggested Citation

Flood, Mark D. and Katz, Jonathan and Ong, Stephen J. and Smith, Adam D., Cryptography and the Economics of Supervisory Information: Balancing Transparency and Confidentiality (September 10, 2013). FRB of Cleveland Working Paper No. 13-12. Available at SSRN: https://ssrn.com/abstract=2354038

Mark Flood

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

Jonathan Katz

University of Maryland Department of Computer Science ( email )

College Park
College Park, MD 20742
United States

Stephen Ong (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Adam Smith

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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