Bank Information Sharing and Liquidity Risk
60 Pages Posted: 29 Mar 2019 Last revised: 1 Feb 2021
Date Written: March 27, 2019
We propose a novel rationale for the existence of bank information sharing schemes. Banks may voluntarily disclose borrowers' credit history to maintain asset market liquidity. By sharing such information, banks mitigate adverse selection when selling their loans in secondary markets. This reduces the cost of asset liquidation in case of liquidity shocks. Information sharing arises endogenously when the liquidity benefit dominates the cost of losing market power in the primary loan market competition. We show banks having incentives to truthfully disclose borrowers' credit history, even if such information is non-verifiable. We also provide a rationale for promoting public credit registries.
Keywords: Information Sharing, Funding Liquidity Risk, Market Liquidity, Adverse Selection
JEL Classification: G21
Suggested Citation: Suggested Citation