Optimal Reporting Systems in Bank Runs

Abstract

We study the role of reporting systems in the context of bank runs. In our model, a financial institution receives an early but imprecise estimate of its investment performance, and its accounting system generates a report. We find that, from a financial-stability standpoint, the optimal reporting system requires full disclosure when the financial institution’s early estimate is below a certain threshold, but no disclosure otherwise. Importantly, such optimal reporting threshold should be tailored to the financial institution's exposure to bank-run risk. In particular, the threshold is non-monotonic and U-shaped in the bank-run risk. We also relate our results to current accounting standards and discuss their implications for policy-making and empirical research.

Keywords: Reporting systems; financial institutions; bank runs; financial stability.

JEL Classification: G21, G28, M41, M48.