Competition and Opacity in the Financial System

Abstract

This paper studies the effect of competition on opacity in the financial system. In my model, two financial institutions competing for investors simultaneously make a public disclosure decision when both are exposed to rollover risk. I find that in the face of rollover risk, competition between financial institutions has a non-monotonic effect on their disclosure decisions. More intense competition can reduce disclosure and make the financial system more opaque, especially when investors' private information about the financial institutions is sufficiently precise.

Keywords: coordination, interbank competition, disclosure policies, rollover risk, financial institutions, bank opacity, higher-order beliefs