Disclosure of Bank-specific Information and the Stability of Financial Systems

70 Pages Posted: 2 Mar 2021 Last revised: 15 Nov 2021

See all articles by Liang Dai

Liang Dai

Shanghai Jiao Tong University (SJTU)

Dan Luo

Stanford University, Graduate School of Business, Students

Ming Yang

UCL

Date Written: November 3, 2021

Abstract

We find that disclosing bank-specific information reallocates systemic risk, but whether it mitigates systemic bank runs depends on the information disclosed. Disclosure reveals banks' resilience to adverse shocks, and shifts systemic risk from weak to strong banks. Yet, only disclosure of banks' exposure to systemic risk can mitigate systemic bank runs because it shifts systemic risk from more vulnerable banks to those less vulnerable. Optimal disclosure thus maximally differentiates such exposure, provided that banks experience runs simultaneously, if inevitable. Disclosure of banks' idiosyncratic factors does not differentiate such exposure, rendering the resulting reallocation of systemic risk ineffective in mitigating systemic runs. In the context of disclosing stress-test results, when the quality of the banking system deteriorates, the regulator may have to face a sudden run on a huge mass of banks rather than gradually abandoning weak banks.

Keywords: information design, coordination game, financial stability

JEL Classification: G01, G21, G28

Suggested Citation

Dai, Liang and Luo, Dan and Yang, Ming, Disclosure of Bank-specific Information and the Stability of Financial Systems (November 3, 2021). Available at SSRN: https://ssrn.com/abstract=3762941 or http://dx.doi.org/10.2139/ssrn.3762941

Liang Dai

Shanghai Jiao Tong University (SJTU) ( email )

Antai College of Economics and Management
1954 Huashan Road
Shanghai 200030, Shanghai 200030
China

Dan Luo

Stanford University, Graduate School of Business, Students ( email )

Stanford, CA
United States

Ming Yang (Contact Author)

UCL ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

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